Each week, we seek expert advice to help a small or medium-sized business overcome a key issue.
Soon after George and Betsy Anne Jakeman emigrated from Oxfordshire, England, to Oxford County, Ont., in 1876, native Canadians taught them how to make maple syrup from the trees growing on their property.
At that time the couple were no doubt thinking more about survival than about how to send the exotic new sweetener to foreign markets. They couldn’t have known that their great-great-grandson Chad Jakeman would be pondering that question nearly 140 years later from his office at Jakeman’s Maple Products.
As the company’s export sales manager, the Jakeman family’s fifth-generation tree tapper has had success connecting with customers through the Internet, government agencies, trade shows and country visits. On a recent trip to China, for instance, his seminar on the health benefits of maple syrup resulted in orders from health food stores, which helped the Jakeman name make inroads into three Chinese provinces.
The Beachville-based company’s annual revenue is in the $1.5-million range, and its exports to Asia, Europe, the Mideast, Australia and North America account for about 20 per cent of the total. In addition to syrup, product offerings include cookies, candy, spreads, granulated maple sugar and icewine syrup.
While he has so far been successful, Mr. Jakeman still has plenty of questions about export financing and logistics. “I wouldn’t call myself a rookie, but I’m close to that,” he says.
Recently, he had trouble sleeping after shipping 19,440 boxes of cookies – that’s two truckloads – to a Mexican food importer. The shipment, ultimately destined for big-box stores in Mexico City, was sent to a clearinghouse in Laredo, Texas.
Mr. Jakeman paid shipping costs and insurance up to that point and the importer picked up those costs from Laredo onward. The importer paid about half the receivable in advance, with the rest insured through Export Development Canada, which meant that Mr. Jakeman would have received 90 per cent of his money back if the buyer had not paid. But a thin profit margin meant he could have come up empty-handed after all his effort.
“It’s risky,” he says of exporting. “They were owing me $31,000, and I lost some sleep over that.”
The deal worked out well in the end, but it left him wondering how much risk he should take on for the sake of building exports. Is his company too small to seek trade financing, where a third party assumes the risk of receivables? Is it unreasonable to ask for full payment upfront, especially from a new client?
And what is the best export designation to use so that the company assumes an appropriate amount of shipping and insurance costs on the movement of goods?
The Challenge: How can Jakeman’s Maple Products best navigate financing in the export world?
THE EXPERTS WEIGH IN
Joy Nott, president and chief executive officer, Canadian Association of Importers and Exporters, Toronto
There’s no such thing as being too small when it comes to exporting. But small companies are often not in the position to risk losing a new customer by demanding payment upfront.
When it comes to choosing between a receivables insurer (such as EDC) instead of more sophisticated trade financing (where the receivables are sold to a third party such as a bank), either option will work. But EDC is probably going to give you a better deal because banks are for-profit and EDC is a Crown corporation, dealing with even the smallest of companies. Before EDC insures your receivables, it checks out the buyer to make sure everything is right.
If you don’t want to go that route because of the cost, I strongly suggest having a bank draft a letter of credit, where a shipment is not released to a buyer until the buyer’s bank has sent payment to the seller’s bank and the seller’s bank has released the necessary documents. Letters of credit have fallen a bit out of fashion these days because they are paper-oriented, but they work.
When it comes to export designations, check out the 11 internationally standardized terms, called Incoterms, created by the International Chamber of Commerce. There are YouTube videos that explain the different options. Pick whichever term you’re comfortable with – that makes you sleep at night – and put it in the contract as a starting point for negotiations. Remember, the person who is most knowledgeable about the terms is likely to negotiate the best deal.
Susan Powell, president, Canadian Food Exporters Association, Toronto
We work with a number of small and medium businesses that will not give credit to buyers in international markets and have successfully done business this way. It is something we have recommended to our members, as well, as the risks are high for a smaller company to extend credit. A company can review the conditions once a relationship between the buyer and seller has been established. If a buyer is persistent about credit and our member is concerned they may lose out on the business, then we do recommend that they work closely with EDC to insure their receivables, as Jakeman’s did with the Mexican order.
We believe that if a company has the supply capacity they should consider exporting, even if they are small, as there is a lot of potential for Canadian products, especially in the Middle East. We recommend that, if considering exporting, a company reach out not only to our association but also to a valuable resource offered by the Canadian government, the Canadian Trade Commissioner Service. These in-market specialists have a wealth of information and are able to provide guidance as to whether a product would have success in the market and can also aid them with some of the regulatory challenges that could be a potential hurdle.
Another excellent option a company should consider is participating in trade missions, which provide opportunities to assess a market and to meet one-on-one with potential buyers to see if there is interest. In many cases funding for programs such as trade missions is available through associations or government agencies.
Bill Thomas, CEO of the tomato-exporting firm Thomas Canning Ltd., Maidstone, Ont.
For a small business, the risk for failure on an export receivable not being collected can be devastating.
Jakeman’s already uses EDC, but it is also not unreasonable to ask for payment upfront. International business (beyond the U.S.) is very rarely done on a receivable basis. Most companies, including ours, ask for payment upfront on most international orders, usually through wire transfers directly to our bank. After establishing a history with the customer, you may begin to share the risk with a down payment of 50 per cent on shipping and another 50 per cent on arrival before title-of-goods transfer.
There are also other monetary instruments, such as irrevocable letters of credit, that can protect you at a nominal cost. Most financial institutions can help with setting up wire-transfer protocols to make it seamless and painless for your customer.
Regarding the Incoterms, in instances where we arrange the ocean freight for the shipment, we typically sell CIF (cost, insurance and freight) at the foreign port. In this case, responsibility for the goods transfers at the port of loading, but we pay the freight and insurance on the goods until they reach the foreign port. Most foreign buyers like using CIF as a method to know their costs prior to arrival at the destination.
In instances where the customer is paying the freight costs, selling Ex Works (EXW) is common. Responsibility is assumed by the buyer when the product is loaded at your facility. Your local customs broker or freight forwarder can provide expert advice on which Incoterm is proper for your sale.
THREE THINGS THE COMPANY COULD DO NOW
Try a letter of credit
This kind of guarantee has fallen out of favour, but it still works.
Check out trade missions
They provide opportunities to assess a market and to meet one-on-one with potential buyers.
Adjust your terms as you go
Don’t be afraid to ask for payment upfront at first. Later you can share the risk with alternative arrangements.
Facing a challenge? If your company could use expert help, please contact us at email@example.com.
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Interviews have been edited and condensed.