Moving Money Across Borders

Managing money globally can be tricky for individuals;
managing a business’s money internationally can be
even trickier… and more expensive.

HERE’S A QUESTION for you. How should you move your business’s money across national borders for a transaction?

Say, for instance, you own a T-shirt screen printing shop in Seattle, Washington in the US, and you’ve decided to start purchasing your blank T-shirts in bulk from China. At high volume, the Chinese just couldn’t be beat for blank T-shirt pricing. Once you get your truckloads of T-shirts, you’ll print catchy stuff on them, and sell them all over town. You and your Chinese source have already done all the preliminary talks and signed a contract, and as soon as they get the money for the first shipment, they will begin production on your shirts.

The easiest way to get your money to China would be to stuff the cash in a big box and ship it, right? No. Don’t be surprised when your national immigration and customs officials show up at your door and take you to prison.

Look, hopefully you’ve gathered by now that going global with your business is exciting and rewarding, but also far from easy. If something seems too good (or easy) to be true, it probably is. Everything has a cost, and if you’re not paying somebody something, you might want to ask yourself why. There’s a more than decent chance that as long as you take special care not to break any national or international laws while you venture across borders with your business, you and your business will be just fine… but probably paying more than you need to. And that’s what this section is about: NOT paying more than you need to in order to move your business’s money across borders.

Taxes and service fees

As you have no doubt discovered, global money management depends, by and large, on your business’s country of origin, your target market, the type of business you’re in, the number of local nationals you plan to employ, etc., etc., etc. Once you start doing business abroad, there are two terms you will quickly become tired of seeing on your invoices and other paperwork: service fee and tax.

Tax breaks vary with all different possible business scenarios. When first looking for a foreign country with which to do business, don’t just pay attention to the vendor that will give you the lowest price on good or services. Pay close attention to the country in which that business is located, and even the city or province, because local taxes and fees apply in certain areas, too. Beyond costs, payment terms can vary among areas, so while it’s smart to shop around for the best value of products, it’s also smart to research and examine for consideration the local government terms that could also affect your bottom-line profits.

Converting currencies

Before you pay your first international tax, you will likely see bank or credit card service fees from currency exchanges. Money is money, right? Yes, but try to pay for your double-tall-nonfat-light whip-no water-coffee delicacy at Starbucks in the US with some Chinese bank notes you found in your pocket from your last trip. The barista will look at you like you have two heads, because most United States businesses don’t take foreign currencies. And there’s a fair reason why.

Whoever ends up with the Chinese notes will eventually have to exchange them for dollars. And guess what: People who exchange money don’t do it for free. As with most transactions, it’s never a flat fee; it’s a flat rate. So if you exchange US$5.00 for Chinese renminbi, the transaction fee might only be 5 cents (assuming the exchange rate is 1%… although between 1 per cent and 3 per cent is normal).

But if you just bought 100,000 blank T-shirts for US$2.00 each, that is a US$200,000 invoice and about $2,000 in exchange fees that someone is going to have to pay. Also, because people really like taking your money, you’ll typically pay an exchange rate adjustment fee AND an exchange rate transaction fee.

It’s uncommon for the buyer of goods to be asked to pay for the exchange fees, but it’s not impossible, especially if the seller knows you are new to international business. The best way to ensure you’re not stuck with this is to ensure this topic is addressed during your up-front negotiations. You may even find foreign companies who quote, sell and receive payments in the US dollar entirely, in order to avoid exchange fees.

Bi-lateral netting

Suppose your company is big enough to have its own subsidiaries in other countries as part of an internal supply chain (e.g., you own a T-shirt factory in China and a T-shirt screen printer and store in Indonesia). You want the subsidiaries to pay each other across borders, and you, the parent company, keep all the bottom-line profits at the end of the day. You may benefit from something called bi-lateral netting.

Bi-lateral netting happens when two subsidiaries of the same company located in two different countries trade goods. For the sake of this scenario, say that the Chinese, who make blank T-shirts, would like buy some of the shirts back from the Indonesian screen printer to resell in China after the catchy stuff gets printed on them.

• So China produces and sells blank T-shirts to your Indonesian subsidiary for US$200,000.

• Indonesia prints catchy stuff on them and sends a portion of the printed shirts back to China so China can sell the printed shirts, charging the Chinese US$100,000 for them.

• A lot of money just exchanged hands between China and Indonesia, namely a total of US$300,000. And both transactions incurred exchange fees and taxes. Seems silly (and a little unfair), right? That brings us back to bi-lateral netting.

Bi-lateral netting is a concept whereby two subsidiaries sign documentation declaring they will only actually pay the net of the tangible related transactions. Since Indonesia only netted US$100,000 from China, that is all the money that actually exchanges hands. And presto! The exchange fee drops by two-thirds.

There are many more ways you can save on the transaction costs of moving money across borders. While your banker stands to gain from them, she ought to also be able to advise you about secure, legal ways to minimize the cost of money in your particular case. The better informed your banker is about your business, the more helpful she can be to you. And if you prosper, so will her bank. So it pays to learn as much as you can and think creatively with your bankers, both at home and in your target market, to make money moves as efficient and low-cost as possible.

S.G.