5 Questions To Ask Your Financial Institution About Its Global Capabilities
Sotiria Krikelis thought she’d picked the perfect bank for her company, which makes Relax Missy foldable ballet flats that women can slip into a purse when they want relief from painful high heels. She sailed through the application for a small-business loan to finance production runs in China in two weeks. The big, global institution even gave her free letters of credit, which her factory required up front.
But there was a hitch: Bank employees botched the inputting of basic information on Krikelis and her three-year-old, New York City-based business, One Life, Live-It, Inc.—and the agony of actually getting the letter of credit delivered was akin to walking in cruel shoes. “Anything you can imagine went wrong, from the misspelling of my business name to the inputting of my Social Security number,” she says. “When they did have to create the letter of credit, they couldn’t find my business name on file or my Social Security number on file.” It took endless phone calls to resolve the problem.
Krikelis kept her loan with that bank but moved her checking account to TD Bank, where she’s never had a problem. As she found out, it can be tricky to figure out which bank is best equipped to handle your global financial needs. A domestic institution that sounds great on paper may turn out to be poor at executing the transactions you need or lack the specialized know-how to do business in your target market efficiently. And if you choose a foreign bank, you could get stung by unfamiliar laws and regulations—and even instability in the local economy that puts your money at risk. “Be careful. Be very, very careful,” advises Mike Arman, an Oak Hills, Florida, entrepreneur who has been involved in the import-export business for 30 years.
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Would you be better off with an overseas bank account?
Some big banks have global branches where you’ll be well served. However, sometimes you may need a bank account in an overseas institution. Say, for instance, you’re going to sell the products you manufacture to consumers in Spain through a web store. It may be easier to handle the transactions through a bank that’s based in Spain than one in the U.S., says attorney Dara Green, director of international tax with the CPA firm Kaufman Rossin in Miami. That may also be true if you have set up a business entity in another country to handle sales generated there and need to pay taxes on that income under existing treaties.
To make the right choice for your business, think through how you’ll be receiving and making payments to vendors and others before deciding what type of account to open, Green advises. Foreign banks may not roll out the welcome mat. Expect to provide extensive information about what type of business you run, who owns it and where it’s getting money. “They basically have to know everything about it,” she says.
To prevent tax evasion, the Foreign Account Tax Compliance Act (FACTA), enacted in 2010, requires all foreign financial institutions to report to the IRS on accounts and holdings of their U.S. clients, both individuals and companies in which they have a substantial ownership interest. “It complicates things,” says Green. “A lot of foreign banks don’t like having a U.S. account holder at all.” Some foreign banks are even purging accounts by U.S.-based clients, she says.
To get a sense of what opening an account will be like at a foreign bank, call and explain your type of entity to bank officials, that you’re based in the U.S.—and want to open an account. Ask: “What information will you need from me, and what restrictions will I have if I open an account with you?” You’ll find out quickly if any obstacles are insurmountable.
Bear in mind that foreign banks are subject to the rules of the countries where they operate—and your money may not be as safe there as it is domestically, in a bank where deposits are protected by the FDIC, says Arman. “I don’t think I’d want to have a bank account in another country unless I knew exactly what I was doing.”
