Step-by-Step Guide to Exporting – Step 8 – Identifying your export financing requirements

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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, there are options that can minimize your risks and even give you a competitive edge.

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 or a lot of new staff. Sources such as the  Canadian Trade Commissioner Service (TCS), Export Development Canada (EDC), and the Business Development Bank of Canada (BDC), offer help ranging from market-entry support to the provision of working capital. Their services are inexpensive and often free: the TCS doesn’t charge for any of its services.

Information to help you learn about export financing is also available from the Canada Business Network.

Export Development Canada provides an extensive list of tailored online resources to help you determine your financing needs.

Tip

Be prepared to meet increased demand from a successful foreign sale. Ask for advanced payments to cover the cost of increased demand and reduce risk.

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 your 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 that 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, which is a longer-term overview of the funds you'll need to complete your export project, that 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 available to Canadian exporters. The TCS can help you navigate through which of these programs may be of value to your company. A sample of relevant programs from Global Affairs Canada and other government departments include:

8.3.1 CanExport

CanExport is a new program that increases the competitiveness of Canadian companies. It will provide up to $50 million over five years in direct financial support to SMEs in Canada seeking to develop new export opportunities, particularly in high-growth priority markets and sectors. Delivered by the Trade Commissioner Service (TCS) of Global Affairs Canada, in partnership with the National Research Council Industrial Research Assistance Program (NRC-IRAP), CanExport provides financial support for a wide range of export marketing activities.

8.3.2 Global Opportunities for Associations (GOA)

Global Opportunities for Associations (GOA) provides contribution funding to support national associations undertaking new or expanded international business development activities, in strategic markets and sectors, for the benefit of an entire industry (member and non-member firms). Annual non-repayable contributions range from a minimum of $20,000 to a maximum of $250,000; funding approvals are made for a one-year period for activities and related expenditures taking place between April 1 and March 31 of the following year. GOA provides matching funds of up to 50% of eligible expenses.

8.3.3 EDC's working capital solutions

Export Development Canada (EDC) offers several financing products for Canadian companies to support their international transactions: to pay for the up-front costs associated with the production of a large export order, to expand into new markets or to respond to a buyer's request for financing. EDC’s role is to help Canadian companies go, grow and succeed internationally. They do this by providing you with financing to cover costs such as work in progress, buying equipment or setting up an office overseas; providing insurance to protect against risks such as not getting paid, political unrest or customer bankruptcy; working with your bank to get the bonds you need posted; and helping you break into new markets which includes introducing you to potential customers. For more information, visit EDC online or call 1-800-229-0575.

8.3.4 BDC’s market expansion financing

The Business Development Bank of Canada can help you meet your working capital needs through long-term financing and flexible repayment options. BDC’s Market Xpansion Loan helps Canadian companies finance the expansion of their domestic market or explore new and larger foreign markets. The BDC Market Xpansion Loan is designed to help exporters realize projects that are key to their growth and success, without putting their cash flow at risk. For more information, visit their website or call 1-877-232-2269.

8.3.5 CCC’s government to government contracting

One of the greatest challenges for a Canadian exporter is standing out from international competitors in the eyes of interested buyers. Offer your foreign government customer the option of an expedited, government to government contract with a Government of Canada assurance of contract performance. The Canadian Commercial Corporation (CCC) works with you to validate the lead with the customer, lay the groundwork for an unsolicited joint proposal, negotiate the contract with the foreign government on favourable terms, sign the contract and then subcontract to your company for the work.

Contact us today to find out how CCC can help qualified companies secure export contracts.

8.3.6 AAFC’s AgriMarketing Program

The AgriMarketing Program, overseen by Agriculture and Agri-food Canada (AAFC), aims to enhance marketing capacity and competitiveness of Canada’s agriculture, agri-food, fish and seafood sectors. The Program assists industry associations to identify market priorities and equip themselves for success in global markets, and provides funding for industry associations to develop and implement long-term international strategies.

Additional resources

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

Learn more

In need of a credit insurance that is quick and hassle-free? See how EDC’s Trade Protect allowed an Ottawa-based company to focus on making commercial drones instead of worrying about getting paid.

Read the article

Export Myth: Exporting is too risky.

Exporting doesn't need to be riskier than doing business at home—it's just different. Letters of credit, export credit insurance and reference checks through banks and international credit reporting agencies can help protect your business. Trade laws also tend to be straightforward and legal advice about them is easily available.

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 your 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.

Tip

The type of your currency holding increases business opportunities abroad. For example, Canadian companies can now use renminbi (RMB) to trade with Chinese counterparts. In addition, RMB is now in the International Monetary Fund’s Special Drawing Rights (SDR) basket, which also brings advantages for Canadian business.

8.4.2 Letters of credit

Letters of credit (L/Cs) name a bank to receive and check shipping documents and to guarantee payment. With an L/C, the costs of financing a transaction may 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, which 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 an L/C 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 is booming.

8.4.3 Documentary credit

Exporters can also use sight and term documentary credits:

  • 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.
  • term documentary credit, in contrast, may allow for payments to be made over terms of 30, 60 or 90 days, or at some other 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 or 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 effects of your buyer not paying can be severe and lasting.

You can protect your company through EDC’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.

Spotlight

If you have outstanding accounts receivable (A/R) but are in need of the cash immediately you can sell your A/R to your bank. A/R discounting as it’s called is made even more possible with credit insurance as the bank can be certain it will be paid.

Learn more about how you can improve cash flows and enter new markets with reduced risk in the Trade Commissioner Service’s (TCS) Spotlight on Export Finance.