With the global market getting smaller and more interconnected every year, businesses with a keen eye toward growth are increasingly looking to expand beyond U.S. borders. There’s a world of opportunity for interested companies — from those looking to grow internationally to startups with a global vision written into their mission statements.
While it’s important to seize the opportunity to expand globally, it’s even more important to do so strategically. Thorough research of new markets, foreign regulatory environments and cultural differences are all critical to consider. Add in foreign exchange and payment systems and these opportunities may seem daunting.
For businesses evaluating an expansion into international markets, here are some factors to consider when crafting your plans.
Once a business decides to expand overseas, there’s a flurry of work to be done, ranging from the owners’ 10,000-foot vision down to tactical and operational matters, such as the drafting of company formation documents (for which a legal advisor may be of assistance), determining the location of operations and opening bank accounts, just to name a few. Hiring the right talent and dealing with foreign currency and payments are also major challenges that come hand in hand with expansion.
As the company starts to establish its overseas entity, currency volatility can become a determining factor of how well or poorly a company performs. For companies with a fair amount of exposure to foreign currencies — usually at least $1 million annually — it’s helpful to think about hedging that exposure. Hedging helps businesses keep expenses predictable — regardless of the exchange rate.
No one can predict the future, but hedging foreign currency typically gives businesses better certainty and stability on what certain expenses and costs will be. In an unpredictable environment, that’s one less thing to worry about. Hedging is offered by most banks and is something any company looking to maintain predictable costs should consider. This year companies that hedged foreign exchange exposure reaped the benefits of some certainty amid the volatility.
One notable trend from the past few years is shorter-term hedging. Increasingly, companies are opting for monthly hedges compared to longer terms of two- to five-year hedges. This is partly due to globalization, which has increased currency volatility.
The pandemic has forced many businesses to pivot, so it’s not surprising that companies slowed or stalled their expansion plans this year. When the pandemic escalated in the United States during the second quarter, there was an abrupt but temporary pause as businesses and individuals retreated to take stock of the situation.
But by the third quarter, buoyed by optimism about the vaccine, there was more movement, and businesses began to forge ahead with revamped plans. Businesses that had already planned to go global scaled back or slowed their rollouts. If they expected to go to five countries, maybe they decided to go to one instead. Some businesses opted to stay closer to home, expanding to Canada and Mexico instead of countries further afield.
While the pandemic slowed some expansion plans, it pushed others to think about global expansion for the first time. With work from home now widespread, some businesses are taking a closer look at the seemingly unlimited talent resources spread across the globe. This is especially true in the technology industry, which has been more amenable to remote work. Businesses are starting to realize that expanding globally opens up not only new markets for their goods and services but also a deeper pool of talent to improve and scale their operations.
While entrepreneurs may not always think to talk to their bank about international expansion, leveraging existing relationships and understanding your bank’s breadth of services is a valuable part of the planning process. At First Republic, our highly experienced Foreign Exchange professionals can assist with sophisticated solutions and strategies to mitigate currency risk for their clients.