Step-by-Step Guide to Exporting

Step #8 - Identifying your Export Financing Requirements

It's important to be diplomatic, especially when 'securing payment' for overseas sales. Demanding payment up front can be a terrible insult in some cultures.
– Exporter

8.1  Understanding the risks of export financing

If by chance your first international order is far larger than you expected, how are you going to finance the expansion you need? Payments can take months, and buyers may default or go out of business.

Self-financing a growing export business can be very risky, especially for new or smaller exporters. Fortunately, however, there are options that can minimize your risks and even give you a competitive edge.

Tip:

Be prepared to meet increased demand from a successful foreign sale.

Export Myth:

I can't afford to export

Yes, you can! Expanding your capacity to fill foreign orders won't necessarily demand large capital outlays and a lot of new staff. Sources such as the Canadian Trade Commissioner Service, Export Development Canada, and the Business Development Bank of Canada offer help ranging from market entry support to the provision of working capital. Their services are inexpensive, and often free.

Information to help you learn about export financing is also available.

Export Development Canada provides an extensive list of tailored resources, including a Export Finance Guide online tool to help you determine your financing needs.

8.2  Leveraging capital

Even though Canada is one of the least expensive countries in the world in which to do business, the costs of exporting can add up.

Because of this, your export drive will need a reliable cash flow. You will also need a comprehensive financial plan for the export venture. If you don't have one, it will be very difficult to arrange the financing the venture may need.

The most important objective of your plan, however, is ensuring that your company always has sufficient cash or operating lines of credit. To do this, the plan must include:

A cash budget – highlights your financing requirements over the next two or three years, so you can determine the timing and amount of your cash expenditures.

A capital budget – a longer-term overview of the funds you'll need to complete your export project, it provides an operating plan against which you can measure actual expenditures and revenues and tells you when the project will start generating positive cash flows.

You'll need to know the timing of both cash inflows and outflows. Cash flow planning can help you defend against such problems as:

  • Exchange rate fluctuations
  • Transmission delays
  • Exchange controls
  • Political events
  • Slow collection of accounts receivable

Accurate details are important to the overall effectiveness of your export plan.

Tip:

International trade payments usually take longer to arrive than domestic ones, so allow for this in your cash flow planning.

8.3  Where to get financial help

There are several sources of financial aid for exporters; three of these are Export Development Canada (EDC), the Business Development Bank of Canada (BDC), and the AgriMarketing Program.

8.3.1  EDC's working capital solutions

With a new international contract comes one of the most difficult obstacles smaller exporters face: raising working capital to fund pre-shipment costs. EDC's Export Guarantee Program (or call 1-866-283-2957) encourages Canadian financial institutions to advance pre-shipment loans to Canadian exporters, and then covers up to 75% of the value of the loan.

8.3.2  Business Development Bank of Canada

BDC can help you meet your working capital needs can help you meet your working capital needs through long-term financing and flexible repayment options (Visit their website or call a representative at 1-877-232-2269 ).

8.3.3  AgriMarketing Program

The AgriMarketing Program aims to enhance marketing capacity and competitiveness of the Canadian agriculture, agri-food, fish and seafood sectors. The Program assists industry associations to identify market priorities and equip themselves for success in global markets. The Program provides funding for industry to develop and implement Long Term International Strategies (LTIS).

AgriMarketing is the successor to the Canadian Agriculture and Food International (CAFI) program. It introduces new elements including support to SMEs, and access to funding to support marketing of innovative products. The Program will leverage the Canada Brand, and starting in 2010–2011, associations will be required to have a multi-year LTIS in place.

Tip:

Canada Business Network has links to international, federal and provincial bodies that offer financial information and assistance to both new and experienced exporters.

8.4  Methods of collecting payment

There are several ways for customers to pay an invoice in international trade: cash in advance, letters of credit, documentary credit, documentary collection and open account. We'll examine them in order of increasing risk to your company.

8.4.1  Cash in advance

Cash in advance is your most secure option because it eliminates all risk of non-payment and adds to working capital. Unfortunately, few foreign buyers are willing to pay cash in advance, although some will pay a portion when goods or services are specially ordered. For services, a retainer might be paid upon signing a contract, after which progress payments are matched to deliverables.

8.4.2  Letters of credit

Letters of credit (L/Cs) rely on banks to receive and check shipping documents, and to guarantee payment. An L/C can allow the costs of financing a transaction to be borne by either the exporter or importer.

Both sight and term payment provisions can be arranged.

Letters of credit can be confirmed or unconfirmed. For example, a Canadian bank can confirm an L/C issued by a foreign bank, thus guaranteeing that the Canadian bank will pay the exporter even if the foreign bank doesn't. This kind of L/C is much better for you than the unconfirmed one.

L/Cs can also be irrevocable. This means they can't be cancelled or amended without your approval. The most secure L/C is one that is both confirmed and irrevocable.

In practice, an L/C works like this:

  • The customer arranges a letter of credit with his or her bank.
  • The customer's bank prepares an irrevocable L/C. This includes specifications as to how you'll deliver the goods.
  • The customer's bank sends the L/C to your Canadian bank for confirmation.
  • Your bank issues a letter of confirmation and sends the letter and the L/C to you.
  • You check the L/C very carefully. In particular, you ensure that it agrees in all respects with the terms of your contract with the customer. If the L/C's terms and those of the contract are different, and if you don't meet the L/C's terms because you overlooked the discrepancy, the L/C may be deemed invalid and you might not get paid.
  • You arrange shipping and delivery with your freight forwarder. Once the goods are loaded, you get the appropriate shipping documents from the forwarder; you use these to prove that you have fully complied with the terms of the contract.
  • You take these documents to your bank, which sends them to the customer's bank for review. The customer's bank sends them to the customer, and the customer obtains the documents that will allow the goods to be claimed.
  • The customer's bank pays your bank, which then pays you.

Tip:

Give your foreign markets adequate attention, even if your domestic economy booms.

8.4.3  Documentary credit

Exporters can also use sight and term documentary credits, as follows:

  • A documentary credit calling for a sight draft means that the exporter is entitled to receive payment on sight, i.e. upon presentation of the draft to the bank.
  • A term documentary credit, in contrast, may allow for payments to be made over terms of 30, 60, or 90 days, or at some specified future date.

8.4.4  Documentary collection

In a collection, you ship goods to an importer (your customer) and forward the shipping documents to a collecting bank. Next, the customer pays the collecting bank in exchange for the documents. You then obtain the money from the bank.

With a collection, no bank has guaranteed that you'll get paid, and you're required to finance the shipment until your customer receives the goods and pays through a sight or term draft.

8.4.5  Open account

Open accounts require you to ship goods and pass title to the customer before payment is made. In these cases, you're fully exposed to any credit risk associated with the customer until payment is received. In addition, because open account terms usually allow 30, 60, 90 days (or even longer) before payment is due, you are in fact financing the transaction for your buyer.

8.5  Insuring against non-payment

The impacts of your buyer not paying can be severe and lasting.

You can protect your company through Export Development Canada's Accounts Receivable Insurance (ARI). ARI protects you against non-payment by covering up to 90% of losses resulting from a wide variety of commercial and political risks. Better still, you'll be able to free up your capital and possibly extend more attractive payment terms and credit options to new customers.