Guide: Spotlight on Export Financing
One of the greatest barriers that SMEs experience when faced with exporting opportunities is the financials. Selling internationally can be very lucrative but doesn’t come without its risks.
This short guide outlines Government of Canada export programs and their respective financing solutions that will help you acquire the funds and guarantees you need to capitalize on opportunities abroad.
Encompasses all of the methods and mechanisms by which firms fund the production, sale, and delivery of goods and services to foreign buyers, and the ways they alleviate the risks of doing business abroad.
Primary concerns for both parties during business transactions are cash flows and payment terms, which become longer when selling to far away markets. There are numerous reasons for both buyers and sellers to need extra financing in order to complete a deal. Sellers may need to invest in equipment or labour to fill an order and the buyer may need capital to cover the cost of the purchase until they have time to sell the goods. This is all complicated further when selling across borders into new and unpredictable economies.
The Canadian Trade Commissioner Service (TCS) is pleased to present the following Spotlight on Export Financing, which illustrates the landscape of Canada’s trade programs and what financial products/services are available to help Canadian companies seize international opportunities. For more information on export financing see the TCS Step-by-Step Guide to Exporting which contains a chapter dedicated to ‘Identifying your export financing requirements’.
Exporting requires trust between both parties that the agreed upon product will be delivered and in return payment will be received. Export financing products such as accounts receivable insurance and letters of guarantee exist in order to mitigate the risks being faced by businesses and their banks. The reduced risk that these products offer can also help you gain access to more capital from your bank.
A sale is only worthwhile if you actually receive compensation for the product or service that you have provided. As mentioned before, with exporting, the added distance between parties can complicate the payment process. There are different methods and tools that can be used to strengthen each side’s trust that the other will honour their part of the deal.
- Payment in advance – This method is the most beneficial for an exporter. In receiving payment for the goods or service before shipment/completion there is no risk of not being compensated and it provides working capital to fill the order. It is however difficult to find a customer that is willing to agree to these terms, and demanding them can be considered an insult in some cultures.
- Open account – Opposite to an advance payment, with an open account agreement the exporter assumes all of the risk (customer unwilling or unable to pay). Once again there are no banks involved. The exporter ships the goods to the international buyer under the agreement that he will be paid at a later date. Common payment periods are 30, 60, 90, 120 days and discounts may be offered if payment is made before the agreed upon time period.
- Documentary collection- The exporter entrusts his/her bank with the task of collection, with no guarantee of being paid.
- The exporter sends his/her bank shipping documents after the shipment has left.
- Once the bank has these documents it will send them to the importer’s bank with payment instructions.
- The importer then pays his/her bank for the documents which will allow them to claim the incoming shipment.
- The importer’s bank then pays the exporter’s bank who forwards the funds to the exporter.
A freight forwarder is a person or company that organizes shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer or final point of distribution. They would provide you with required shipping documents such as:
- Bill of lading (proof of shipment)
- Packing slip
- Certificate of origin
- Inspection certificate
- Letter of credit/Documentary credit- Letters of credit (L/C) outline the terms and conditions for a shipment and name a bank to receive and check shipping documents as well as guarantee the exporter that they will be paid even if the buyer becomes unable to do so.
- The importer arranges an L/C with his/her bank.
- The importer's bank prepares an irrevocable L/C which includes specifications as to how you'll deliver the goods.
- The L/C is sent to the Canadian bank to be confirmed, it’s then forwarded to the exporter with an issued letter of guarantee.
- You arrange the shipping with your freight forwarder who will provide you with the necessary shipping documents once the goods are loaded. These documents are used 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 importer's bank for review. The importer's bank sends them to the importer who obtains the documents that will allow them to claim the good.
- The importer’s bank pays your bank that then pays you
Unconfirmed – The bank that opens the letter simply informs the seller of its terms and conditions.
Confirmed – The bank guarantees that the seller will be paid even if the buyer becomes unable to do so.
Irrevocable – The L/C can’t be cancelled or edited without your approval.
Sight payment – The paying bank is responsible to do so upon seeing a sight draft, received when the shipment has arrived.
Term payment – Set terms for when payments are due ex. 30, 60, 90 days or a later date.
Inspect L/Cs very carefully. The terms may differ from an original contract you have and if the exact specifications aren’t met the L/C could be deemed invalid, meaning you may not be paid.
Canada’s trade programs
Canada is committed to helping its companies achieve success in international markets. It has created the following programs dedicated to increasing exports by assisting Canadian companies with financing, advising, and connecting them to international buyers, partners and investors.
|Business Development Bank of Canada (BDC)||Canada’s only bank dedicated to Canadian entrepreneurs. BDC specializes in small and medium sized companies.|
|Canadian Commercial Corporation (CCC)||Helps Canadian exporters win contracts with foreign governments.|
|Export Development Canada (EDC)||Canada’s export credit agency, offering financial services to Canadian exporters and their international buyers.|
|Canadian Trade Commissioner Service (TCS)||Canada’s largest network of trade experts, on-the ground in more than 160 cities around the world. The TCS offers its services free of charge for qualifying businesses.|
These resources are not meant to eliminate the need for conventional banks who are still a primary source of loans and lines of credit. In fact their products and services can help you acquire more favourable financing terms than you may have otherwise received.
All of these programs consider each other to be partners and work together to help strengthen Canada’s international reputation as a desirable trade partner.
These resources are not mutually exclusive in terms of their use and offer different services to help companies at all stages in their life. The TCS is a good starting point; they can evaluate your business and then direct you to the partner that will best suit your needs. Their global network of trade commissioners creates a web of in-market knowledge on emerging trends as well as a large collection of government and private sector contacts.
The TCS works closely with EDC and its other partners to create business opportunities for their clients through mediums such as webinars, trade missions, networking events and organized business-to business (B2B) meetings at trade shows in Canada and around the world.
Innovation Canada has created an online tool to help match you with the right advice, funding or connections for your business needs.
Canada has agreements in place with various countries in order to help facilitate trade for Canadian companies. See the TCS Spotlight on Free Trade to learn more about how you can take advantage of favourable exporting conditions.
Cash flow solutions
Financing can be very helpful for companies whether they’re trying to acquire capital needed to fill an order or to hold them until they can move the products they have purchased.
BDC has financing options, primarily for businesses in earlier stages such as start-ups and high growth companies. Quick loans received in five business days or less are available online up to $100,000. Larger sums of capital can be acquired for greater investment needs such as the purchase of new equipment or financing new technology which may be required to increase capacity in order to meet product/service demand.
BDC also has a solution specifically for companies looking to grow their business. The Xpansion loan can be used for various growth activities in new markets either domestically or abroad. With flexible payment terms of up to 8 years in length your cash flows will be protected. Eligible projects include but are not limited to:
- Investing in technology or employees
- Developing new products
- Launching a marketing campaign
- Applying for or purchasing intellectual property (Trademarks, patents, copyrights)
Venture capital is another form of financing available from BDC for situations where you need to invest in innovations, more working capital, and transfer or buy a business.
EDC also offers a wide range of lending products to help exporters close deals and continue to grow:
- Buyer financing - EDC will actually extend a loan to qualifying international buyers which may not be as available or favourable in their home country. The ability to offer financing is another aspect to add to your sales pitch.
- Direct lending – acquire loans needed for expansion at rates that may be more attractive than those of commercial banks in certain markets.
- Structured & project financing – designed for large, long-term contracts where not many other options are available.
Loans and lines of credit have distinct differences.
Loans - legal, contractual obligations where a lump sum is received for the promise of scheduled payments with a fixed interest rate.
Line of credit – must be renewed annually and payments are based on the amount that is actually drawn from the line of credit. The interest rate is variable as well, tied to the prime rate.
CCC supports the diversification of international trade for Canada by helping you gain access to foreign government procurement markets through a government-to-government (G2G) contracting approach. CCC positions qualified Canadian exporters to win contracts and deliver successful projects for foreign government buyers. CCC’s contracting approach can improve your access to senior decision-makers, differentiate your proposal, accelerate the procurement process, and reduce contract and payment risk.
CCC’s focus is to work with exporters in markets where the business environment is less predictable and where the foreign government buyer may lack the capacity or capability to effectively tender projects. CCC actually submits a joint proposal with you, signs the contracts with the buyer and subcontracts the obligations back to you.
From a financial perspective, aside from the avoidance of extensive tender costs and time delays, partnering with CCC offers many inherent advantages. CCC’s performance guarantee may reduce, if not eliminate, foreign government bonding requirements. Your government customer will have the assurance of the government of Canada that the contract will be delivered per the agreed upon terms and conditions, effectively reducing their risk.
G2G contracts offer peace of mind to both you and your customer. All payments flow through CCC who can make a real difference in resolving issues and securing payment. By taking on all performance oversight and financial administration of the contract, CCC mitigates risks for both parties and increases overall customer satisfaction.
While CCC doesn’t finance G2G contracts itself, it will help identify and work with possible sources of financing including, but not limited to EDC.
Insurance and guarantees
Security of cash flows is especially important when engaging in new or high-risk trade. This risk affects banks as well as exporters. Accounts receivable insurance (also known as short-term credit insurance or trade credit insurance) gives both parties peace of mind and makes their work easier.
Most of Canada’s accounts receivable insurers are multinational entities that provide the additional benefit of global expertise. Their sector-specific experience in credit management in a variety of economic and political climates can help you reduce credit investigation costs and improve your financial forecast.
Accounts receivable insurance helps businesses to:
- Reduce financial risk – Protect against bad debt loss by acquiring coverage for key accounts or all buyers.
- Improve cash flows – Maximize borrowing power and increase working capital for growth and expansion.
- Support credit management - Complement existing credit control procedures.
- Improve sales – Offer clients and prospects better payment terms.
The Receivables Insurance Association of Canada (RIAC) is an organization representing short-term credit insurers, banks, brokers, and EDC. Its purpose is to promote the interests of domestic and international accounts receivable insurance in Canada.
Accounts receivable insurance guarantees you will be compensated for your exports and allows you to offer more favourable payment terms to international customers. This risk reduction measure allows you to safely enter new markets and offers a competitive edge.
EDC offers a number of export financing products and solutions that can help your business acquire and be more confident in international sales. Their insurance products are only available for exports; they do not cover domestic sales.
- Insurance – a wide range of insurances are available to protect you from non-payment and assure you that once you’ve completed a sale you will collect payment whether it’s from the customer or EDC.
- Credit insurance – EDC will cover up to 90% of a sale that a customer becomes unable to pay due to bankruptcy, contract cancellation or currency conversion issues.
- Political risk insurance – not all environments have Canada’s stability, political violence or unrest could result in the expropriation of your investment, currency devaluation and transfer restrictions as well as non-payment.
- Performance security insurance – EDC will cover up to 95% of insured losses if a letter of guarantee is wrongfully called by the counterparty.
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.
- Guarantees – while importers and exporters deal with risk, for banks, that is what all of their decisions are based on, if you can decrease their risk you can increase what they are willing to offer you.
- Export guarantee program – EDC provides your bank with a guarantee that if you are unable to pay back some of the money you owe they will cover it. This tactic is used to increase the amount of credit a bank will extend to you.
- Account performance security – EDC will guarantee your ability to fill orders so that your bank is willing to issue letters of guarantee on your behalf without asking for large sums of capital as collateral.
International customers can request guarantees in the form of letters of guarantee or surety bonds. In either case they want to be assured they will receive what is stipulated in the contract. EDC will guarantee your bank of payment who can then counter guarantee the importers bank of receipt of goods, which are then paid for by the customer.
Have policies in place to cope with currency exchange. In contract negotiations you can also agree on a fixed exchange rate that will be used for payments and help protect your bottom line from fluctuations in value.
Unlike financing products, funding and grants do not require interest or premiums be paid for capital that is received.
The TCS primarily offers global market intelligence, entry advice and connections to qualified business contacts however they do also have funding programs available to help companies expand into new markets.
- CanExport - offers direct financial support to small and medium-sized enterprises (SMEs) developing new export opportunities in international markets. The program covers a percentage of eligible expenses for a variety of export marketing activities such as business travel, participation in trade shows, market research, adaption of marketing tools and more.
TCS grant programs, just like their services, are free of charge for qualifying companies; contributions do not have to be paid back.
- Global opportunities for associations (GOA) - provides contribution funding to support national associations expanding or committing to new international business development activities, in strategic markets and sectors, for the benefit of an entire industry (member and non-member firms).
- Going Global Innovation (GGI) - is specifically designed to promote and enhance Canada's international innovation efforts. The program supports researchers who aim to commercialize technology by pursuing collaborative international research and development (R&D) opportunities through partnerships with key players in foreign markets.
There are numerous funding and financing opportunities available for Canadian companies looking to participate in trade, some exclusively for women. Find an inclusive list on the Business Women in Trade (BWIT) website.
Are you export ready?
The Step-by-Step Guide to Exporting will help you to:
- Sell to more customers. Target online buyers.
- Enter more markets. Leverage the benefits of free trade.
- Save time & avoid costly risks. Learn the legal aspects of trade.
Access these additional resources:
- Canadian Trade Commissioner Service (TCS)
- New product helps exporters do business abroad – and get paid
- Funding to help kickstart your international expansion (Podcast)
- Global markets action plan
- Business Development Bank of Canada (BDC)
- 7 sources of start-up financing
- 3 keys to obtaining a business loan
- Financial management for Small Business
- Free eBook: How to get a business loan
- Canadian Business Network
- Canadian Commercial Corporation (CCC)
- Is CCC right for you? Try our free self-diagnostic tool
- Have a Government procurement lead? Share in full commercial confidentiality
- G2G Exporter Resources
- Export Development Canada (EDC)
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