Businesses expanding internationally tend to budget carefully for the legal and tax work of establishing an entity, and almost not at all for the mechanics of getting money into it and operating it afterwards.
That's the wrong way round. Incorporation is a known process with a known cost and a professional handling it. Banking, funding and the first six months of operations are where timelines slip and unbudgeted costs appear.
The banking gap
Here's the sequencing problem nearly every expansion hits.
You incorporate the entity. You now need a local bank account to pay local costs — an office deposit, a first hire, local advisers, registrations.
Opening a corporate bank account in a new jurisdiction, for a newly incorporated company with a foreign parent, no local trading history and a director who isn't resident, is slow. Depending on the market it can take weeks to several months. In some jurisdictions it's genuinely difficult without local directorship or a physical visit.
Meanwhile costs are accruing and the entity has no way to pay them.
What businesses actually do in that window: pay from the parent and reconcile later, which creates intercompany balances and transfer pricing questions nobody intended; or use a director's personal card, which creates a different set of problems.
What works better: a named multi-currency account in the parent's name, holding the local currency, used to make payments into the market while the local account is being established. The payments are properly documented as parent-funded from the outset, the local currency is held rather than converted transaction by transaction, and nobody is putting an office deposit on a personal credit card.
It isn't a substitute for a local account where one is legally required. It bridges the gap.
Capitalising the entity
The initial funding decision — equity or intercompany loan — is a tax and legal question, and the answer varies by jurisdiction. Thin capitalisation rules, interest deductibility, withholding tax on interest and local minimum capital requirements all bear on it. Get advice.
What's worth noting on the currency side:
The amount is usually set in the local currency. A minimum capital requirement, or a funding figure agreed as "enough for eighteen months of local costs", is a local currency number. The sterling cost of providing it depends on the rate on the day you transfer.
An intercompany loan creates ongoing exposure. A sterling loan to a euro-functional subsidiary, or vice versa, generates foreign exchange gains and losses on revaluation. Depending on how the loan is designated — particularly whether it forms part of the net investment — those movements may hit profit rather than reserves. Worth understanding before the loan is documented rather than after the first audit.
Further funding rounds are forecastable. Most new entities need more than the initial injection. If you expect to fund €200,000 a quarter for the first two years, that's a predictable currency requirement and a candidate for forward cover.
The first-year cost base
A new overseas entity accumulates local currency costs quickly:
Office or coworking commitments, often with a deposit
Local salaries or employer-of-record fees
Local advisers — accountants, lawyers, company secretarial
Registrations, licences and filing fees
Local marketing and business development
Equipment and IT
Nearly all of it is in the local currency, nearly all of it is paid from a sterling cost base, and most expansion budgets are built at the spot rate on the day the plan was approved.
If the budget assumed a rate and nothing was hedged, a 10% adverse move means the entity runs out of funded runway two months early — and the request for more capital arrives with an explanation that has nothing to do with how the market entry is performing.
That's an avoidable conversation. Hedging the forecast first-year funding requirement fixes the sterling cost of the expansion, which is what the board approved.
Questions to resolve before incorporation
How long will local banking take, and what will we do in the interim?
What's the fully-loaded first-year cost in local currency, and at what sterling rate have we budgeted it?
Equity or loan — and if a loan, how is it designated for accounting purposes?
Are there restrictions on getting money out again? This question gets asked far too late. Some jurisdictions make repatriation slow or conditional, and that materially affects the structure you should choose.
Who owns the currency decision? Usually nobody, because expansion sits with operations and currency sits with finance.
The pattern worth avoiding
The common version of this going wrong isn't dramatic. It's an expansion that was commercially sound, approved on a budget built at spot, funded transaction by transaction at whatever rate applied, which runs short of money earlier than planned and gets reviewed sceptically as a result.
The market entry was fine. The funding plan had an unmanaged variable in it.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621