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Exporters: Receivables insurance can make the banks sit up and take notice

Illustration of a bank with an open vault, showing piles of gold bars and cash.

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The world was RtTech Software Inc.'s target market right from the start. The Moncton developer of energy and asset management software builds its products using a technology platform owned by a California company with installations in 15,000 sites across the globe.

For RtTech, this arrangement means an open door to its partner company's customers.

"Because we're based on their platform and they're a partner, we can go and market our products to their customers," says Pablo Asiron, chief executive officer of RtTech, a three-year-old company that generates about 85 per cent of its revenue in markets abroad, such as Australia, the United States and Europe. "We went to a couple of trade conferences and immediately had a lot of people asking us about installing in their facilities."

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Last year, Mr. Asiron was approached by a large multinational technology company that wanted to resell one of RtTech's products under its own brand. It was a major opportunity for RtTech, but the company needed financing to secure and fulfill the contract.

None of the banks Mr. Asiron applied with would extend RtTech a line of credit.

"As a startup company, if you don't have three years' history of being profitable, banks don't even want to look at you," recalls Mr. Asiron. "That was the case with us, so getting financing was definitely a challenge."

The banks did offer Mr. Asiron a suggestion: insure the company's accounts receivable on international sales. Mr. Asiron, who was not familiar with accounts receivable insurance, approached Export Development Canada (EDC), the country's export credit agency and one of several organizations in Canada that provides insurance and financial services to Canadian exporters.

EDC conducted due diligence on RtTech's prospective buyer to assess its integrity and ability to pay. Shortly after, RtTech got its accounts receivable insurance from EDC, which in turn led to approval on a line of credit from a Canadian bank.

"When we were looking at ways of obtaining a line of credit, accounts receivable insurance was the one thing that all the banks wanted to see," Mr. Asiron says. "Once we got ours from EDC, the banks became more willing to lend us money."

Like Mr. Asiron, many Canadian entrepreneurs who are exporting or looking to sell abroad don't know about receivables insurance, says Igor Chigrin, co-founder of Win Global Partners, a Toronto export and import consulting firm. Yet this financial product is critical for companies that do business abroad, he says.

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"What accounts receivable insurance does is guarantee that the exporter will get paid for products or services they sell overseas," Mr. Chigrin says. "As an exporter, you can get insurance for up to 90 per cent of your invoice."

Depending on the policy, accounts receivable insurance for exporters can cover all sales from outside Canada, or just sales from a single buyer, in case a customer defaults on payment.

EDC spokesperson Phil Taylor points to other types of insurance the agency offers exporters. These include contract frustration insurance that provides coverage from losses on one particular contract, political risk for exporters that do business in politically unstable countries, and performance security insurance, which covers the loss of a cash guarantee that an exporter put up to bid on a project.

"If you are active in international markets, then at one point in time you are going to want to look at one or a combination of these insurance solutions," says Mr. Taylor. "A good rule of thumb to follow is: When a contract is in excess of 25 per cent of your balance sheet, then you probably will want to start to look at insurance."

Mr. Chigrin agrees. He cites one client, a furniture manufacturer, as a cautionary tale. The company sent truckloads of products to a U.S. importer that had put down a cash deposit for a small percentage of the total sale. But after accepting the goods, the importer did not pay the balance owing.

"So now my client is out $300,000 and he's suing the buyer," Mr. Chigrin says. "It's going to take time for him to get his money and it's going to cost him a lot in legal fees. The quickest and easiest way for him to avoid this was to insure his receivables."

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Applying for insurance also gives exporters access to in-depth market intelligence about a prospective customer – information that is usually hard and expensive to gather. But both Mr. Chigrin and Mr. Taylor encourage companies looking to do business abroad to also do their own research.

Reference and credit checks are a must, Mr. Chigrin says.

"Call up the buyers' existing suppliers and ask questions around transactions, any delays in payments and any other concerns," he says. "Depending on the country where your buyer is located, you should also be able to get a credit check, at a cost of a few hundred dollars, from international credit bureaus such as Dun and Bradstreet."

Mr. Taylor suggests checking in with chambers of commerce in Canada and abroad to see what they know about a potential buyer. The Canadian Trade Commissioner Service is also an invaluable resource for company and market research, Mr. Taylor says.

Exporters may also want to retain the services of Trace Inc., an Annapolis, Md., company that provides risk assessment and due diligence services.

"Their fee will pay for itself in spades," says Mr. Taylor. "When you put a company's name through Trace, they'll check to make sure it's reputable and has no record for bribery or corruption. It's basically another type of insurance because the last thing you want to do when you're conducting business overseas is to get involved in bribery and corruption."

With a client roster of Fortune 500 companies, RtTech isn't too worried about getting involved in seedy business abroad or not getting paid by a customer. Nevertheless, Mr. Asiron says he and the company's shareholders like knowing they have accounts receivable insurance – and the market intelligence provided by EDC.

"Whether you're doing business in Canada or globally, it's good to know what you're getting into," he says.

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