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Options and credit practices in export financing Add to ...

Exporters doing business in unfamiliar territory can expect higher risk, and those additional financial and political risks may require extra financing. To develop a clear and concise export financing plan, you must assess a number of issues.

Working capital

Prospecting and operating in foreign markets usually requires a greater investment than the same operations would need at home. A single large order or many small orders from overseas can affect your productivity and inventory capacity, and in some cases foreign buyers may request longer payment terms, which can affect your working capital.

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For the extra working capital that exporters often need, BDC offers flexible financing that can complement your existing line of credit. This helps stabilize your cash flow as your company takes more risks and grows.

Political risk insurance

Not all importing countries enjoy the political, social and economic stability to which we are accustomed in Canada. Special insurance policies are often necessary, particularly to protect overseas investments. Export Development Canada's (EDC) Export Protect product insures transactions against non-payment by foreign buyers. EDC will help collect your funds in cases of breach of contract, non-payment, expropriation or political instability.

Payment guarantees

You may be dealing with clients and intermediaries you hardly know, in an economic context that is foreign to you. Take extra precautions and expect complications, such as late payments and fluctuations in exchange rates. You should have a plan of action in place before such problems arise.

Use EDC's Export Check to explore your foreign buyers' online credit profile. EDC also offers loans or credit lines to foreign buyers to encourage them to purchase goods or services from Canadian companies. In this way, a Canadian business can make what amounts to a cash sale, and EDC will collect the payment. EDC's accounts receivable insurance (ARI) protects your business against foreign buyers who can't or won't pay up. It covers up to 90 per cent of the value of the sale.

Security for foreign distributors or clients

The people you will be doing business with abroad do not know you, so they may ask you for guarantees. That is particularly true in the public, agriculture and food sectors. The Canadian Commercial Corporation (CCC) offers foreign buyers security by providing a Canadian-government-backed guarantee of contract performance. The agency offers a range of pre-contract, advisory and post-contract services.

Long-term financing to purchase fixed assets

As your export venture thrives, your productivity and capacity will need to grow, meaning you may be required to plan for long-term financing. BDC financing products for present and future Canadian exporters combine long-term financing and flexible repayment options. BDC can finance the equipment purchases, retooling and increased inventory that exporters often need. It can also offer commercial real estate financing should you outgrow your current facilities.

Cash in advance

When a domestic buyer has a good credit rating, sales are often made on an open account. However, this approach fully exposes the seller to credit risk until payment has been made. When exporting, there are several ways to protect your sale. One option is to consider asking for cash in advance. This relieves you of collection problems and allows immediate use of the money. Wire transfers are commonly used. Keep in mind that payment by cheque may result in collection delays of up to six weeks. If you accept credit card payments, beware of fraud.

Letters of credit

A letter of credit is essentially a financial contract between a bank, its customer and the beneficiary. It outlines the conditions under which payment will be made. The buyer generally specifies the conditions, which usually include provision of insurance forms, bills of lading, customs forms, various certificates and the like. Think of these documents as ways of safeguarding the integrity of the purchased product.

Collections

Collections are usually the responsibility of the exporter's bank. There are two types of collections: documentary and draft/clean. In a documentary collection, your bank deals with a foreign bank and sends payment instructions. A documentary credit means you are entitled to receive payment once the shipping and commercial documents have been presented to the foreign bank. A draft/clean collection is similar to a cheque. The buyer sends a draft while waiting for the shipment to arrive, and the exporter transfers the product when the draft clears. A draft carries a risk similar to that of a cheque, as it may be not honoured.

Open accounts

This is the riskiest payment option, as the risk falls entirely on the exporter. Buyers and sellers will typically negotiate a payment deadline of 30 to 90 days or even longer, depending on the relationship and transaction. If you are considering this form of payment, you need to have a clear understanding of all political, economic and commercial risks involved.

Dealing with payment problems

If negotiations with your customer fail, you should obtain the assistance and advice of your bank, legal counsel and other qualified experts. Since arbitration is often faster and less costly than legal action, this step is preferable, provided both parties agree to take their dispute to an arbitration agency.

Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.

 

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