Financing and capitalising your business in China can be a challenging task. Knowing a couple of key points will help you to stay on the right path when launching and running your business in China.
Companies have different financial needs in each phase of their life cycle and, especially during the start-up period, the cash flow can be tight as the revenue may be insufficient for covering the initial set-up and daily expenses. Financial planning is, therefore, necessary to avoid cash flow problems. This article explains how to define your financial needs and how to fulfil them.
Running out of cash can have serious consequences for companies, such as missing business opportunities due to not being able to honour contracts with clients or purchase raw materials, arrange the delivery of goods by an agreed-upon date, or pay wages, custom duties and taxes. Suppliers could also take legal action if a company does not honour its payment obligations, while goods could be stuck at customs and be damaged if the import VAT is not paid.
Meanwhile, customers may not pay in time, which could affect the cash flow of the business. Financing your business in China may be slower and more difficult than expected due to the strict capital flow controls imposed by the banking authorities.
It is, therefore, particularly important for companies to define their financial needs and make cash flow projections before registering their companies in China to assess the suitable registered capital value in the first place and also to understand when the company may need additional funds and how to procure them. Capital increases and intercompany financing can be alternative tools to a bank loan.
Peculiar to China when setting up a WFOE (Wholly Foreign-Owned Enterprise), it is necessary to declare a total investment value, which refers to the total amount of funds, including capital and debt, required for the planned business project.
Besides this, companies will have to define the registered capital, which refers to the total amount of capital contribution to be paid fully by the shareholders to be used at the beginning of a company’s life cycle to pay for rent, salaries, goods and so on until the company is able to generate cash reserves and independently finance its operation.
For most industries, there is no minimum requirement for the registered capital, except for specific sectors such as freight forwarding, fund management, insurance companies and e-commerce when operating on certain platforms.
It is not necessary to inject all the registered capital at the time of incorporation but instead within the terms stated in the Articles of Association decided by the company (even as many as 20 or 30 years).
Despite this, the capital is vital for successfully starting and sustaining a business and it would be a mistake not to measure it according to the company’s financial needs and strategic plans. For a proper assessment of capital, companies should be familiar with Chinese business practices and take into consideration all the expenses that could occur in daily operations such as rents, salaries, social insurance and housing funds, customs duties, direct and indirect taxes, logistics and marketing costs.
It is common for the registered capital not to be sufficient to cover the cash flow needs and once the registered capital is fully paid and used up, companies need to think about how to inject more funds into the business. As obtaining a bank loan may be difficult for newly established businesses, capital increases or intercompany loans may be the solution.
Financial needs may change over time for several reasons, such as extraordinary or unforeseen costs, the company not reaching its expected growth, deciding to enter a new market segment or wanting to attract new clients. On occasion, businesses may have to resort to a capital increase.
To increase the registered capital, it is necessary to procure multiple authorisations from different offices and this process may take from six to eight weeks to complete, going from the moment the capital increase process begins to when the new capital can be injected and used in the bank account.
This timeframe is long, especially if the company has a tight cash flow and, for this reason, it is advised to pay attention to cash flow and implement reliable financial controls as increasing capital is not a quick or easy process. You can see the steps involved for a trading WFOE and estimated timeline below:
|No.||Office||Certificate or Procedure||Tentative Timing|
|1||Local SAMR (AIC)||Business licence update||10 business days|
|2||Local SAT||Tax system - update the new registered capital||1 business day|
|3||Local Bank||RMB basic account - update the company information||10-15 business days|
|Capital account opening - update the company information|
|4||Local MOC||Foreign trade operator licence||5 business days|
|5||Local GAC||Customs registration filing receipt||5 business days|
|6||Local GAC||E-port cards - company information update||5 business days|
After the company has updated the new registered capital information with the bank, it is possible for the shareholder to inject new capital into the capital bank account. According to regulations from the SAFE (State Administration of Foreign Exchange), which supervises overseas funds inflows, outflows and currency exchange, banks need to submit a so-called ‘FDI report’ in order to register the foreign capital inflow. After three to five days, once the registration is completed, the capital can be converted and settled to the RMB basic account and used for daily business expenses.
Whether the company does not need the additional funds due to a change of business plans or due to any other situation that may occur in the future, it is possible to decrease the registered capital provided that the accumulated cash reserves allow for payback without impacting the company’s cash flow or harming the creditors.
Intercompany loans can be granted to the Chinese subsidiary from other companies in the corporate group, usually for temporary financial support purposes. In China, the borrowing amount for foreign intercompany loans is limited to the ‘borrowing gap’, which is the difference between the total investment and the registered capital for the foreign invested enterprises.
The ratio between the registered capital and total investment, defining the maximum loan quota, is shown below:
|Total Investment||Registered Capital (min.)||Loan Quota (max.)|
|< USD 3 million||70%||30%|
|USD 3 million - USD 10 million||50%||50%|
|USD 10 million - USD 30 million||40%||60%|
|> USD 30 million||30%||70%|
To obtain a loan from a company in the same corporate group, it is necessary to sign a loan agreement that specifies the conditions, the interest rate, duration and repayment terms of the loan and to file an application with the SAFE. Once the loan is approved and all necessary documents from SAFE are available, an intercompany loan account can be opened at the bank.
The approval time for loans at the SAFE is around 20 working days after the application’s submission date and an additional 10 to 15 working days will subsequently be required to open the loan account at a local bank. Finally, the company (the lender) can then transfer the funds, which will be also subject to FDI registration. Specific requirements for the account opening will depend on the local bank, but it is possible that the original passport of the company’s legal representative will be needed to open the account.
In conclusion, there are different financing solutions for companies in China depending on specific needs as alternatives to other bank financing tools (such as credit lines, bank guarantees and cash pooling) that can be difficult to obtain for foreign companies.
It is necessary for companies to rely on a detailed and accurate financial statement, to constantly monitor expenses, forecast cash flow movements and plan the suitable financing structure in advance to support the smooth and efficient growth of the business.
How Can Hawksford Help?
Hawksford is an established provider of company registration and outsourced corporate services in China. With more than 100 multilingual professionals based in Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen, we are able to offer the very best local knowledge to our international clients and provide them with comprehensive introductions to the many local and international banking institutions we’ve had the pleasure of cooperating with over the last decade.
We provide accounting bookkeeping services, including the preparation of management reporting according to Chinese GAAP or other International Accounting Standards, in order to satisfy the requirements of our multinational clients. Companies today need to ensure the quality of their financial reporting for internal purposes, rather than just compliance. Not only do companies have to fulfil their legal obligations to submit their financial accounts to the local tax bureau in a timely and accurate manner, but they also have the duty to their shareholders to produce accurate statements that are necessary for strategic and financial planning, decision making and performance monitoring.
We have ample experience in preparing customised reporting packages, budgeting and cash flow forecasts. We also advise clients regarding financing solutions and assist in capital increases and intercompany loan procedures, while liaising with banks for alternative and innovative solutions.