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Exporting to the United States - The basics of export financing

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For updated information on the new Canada-United States-Mexico Agreement (CUSMA) and it’s benefits, refer to CUSMA and small and medium-sized enterprises.

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5. The basics of export financing

It may not be possible for you to finance an export initiative entirely from your company's resources. For example, you might need additional capital to cover production and operating costs until the goods are finished, shipped and paid for. In such cases, you will need to know what financing might be available and where you can obtain it on the best terms.

The guide Grants and Financing, which you will find at
www.canadabusiness.ca/eng/page/2868, provides a detailed overview of how Canadian exporters can finance their U.S. initiatives. The essentials are fairly straightforward and we will examine them in the next sections.

5.1. Types of financial assistance

There are several types of basic financial assistance for export ventures: pre-shipment financing, post-shipment financing, medium-term financing and project financing.

5.2. Obtaining financial assistance

There are three chief sources for the financial help you may need: banks, government assistance programs and venture capital. In brief:

5.3. U.S. buyer financing

Suppose you have a potential U.S. buyer who does not, for legitimate reasons, have the immediate financial resources to purchase your goods. You may be able to arrange financing for such a buyer through Export Development Canada, which can offer flexible financing and payment options to companies wanting to buy Canadian goods and services. Better yet, you can enjoy peace of mind knowing that you can secure a cash sale while EDC assumes the risk if your customer does not pay. To find out more, refer to EDC's Financing page at www.edc.ca/financing.

5.4 Payment methods

The most common U.S. payment method is by open account, with a 30- to 90-day credit period, but the most secure method of payment is a confirmed and irrevocable letter of credit

Canadian businesses exporting to the United States should be prepared to give credit terms to their buyers. The most common payment method is by open account, with a 30- to 90-day credit period. "Open account" means that you agree to ship the goods, or provide the services, before getting paid. This is simple and involves less paperwork than other payment methods, but it has one huge drawback. You are fully exposed to your buyer's credit risks and if the buyer refuses to pay, for whatever reason, you may not get your money.

You can insure yourself against such risks, but another option is to seek more favourable payment terms from your customer, at least until you develop a relationship. These include:

5.5 Dealing with non-payment

If you have delivered your goods to the U.S. company but it has not paid you, what recourse do you have?

You can hire a lawyer or a collection agency, but it can still be very difficult for a Canadian exporter to recover payment from recalcitrant U.S. customers, especially if the customers have sought bankruptcy protection. Legal action can be exceedingly costly, so arbitration or mediation to settle out of court is preferable if you can arrange it. This, of course, presupposes that you wrote an arbitration/mediation clause into the contract with your buyer. If you did not, your best course is to obtain legal advice and consider whether it is even worthwhile to pursue payment.

Hiring a licenced collection agency can also help to encourage payment. Although cheaper than hiring a lawyer, this is still expensive because collection agents take as payment a percentage of the amount they recover.

5.6 Reducing financial risk through buyer credit checks

A buyer's failure to pay, whether because of bankruptcy or for some other reason, can spell serious financial trouble for a Canadian exporter that is badly exposed to the buyer's risk. However, you can do a lot to protect yourself from the risk of non-payment by carrying out a careful credit check before signing the contract. Some of the questions you need to ask are:

You can do a lot to protect yourself from the risk of non-payment by carrying out a careful credit check before signing the contract.

There are several places you can go to obtain this information:

5.7 Reducing financial risk through export insurance

If you cannot get cash in advance, purchasing some form or export insurance is the best way to avoid the most serious consequences of buyer non-payment. In Canada, these types of insurance are the specialty of Export Development Canada and include:

5.8 Currency fluctuations

Fluctuations in the value of the Canadian dollar relative to that of the United States can affect export profits either positively or negatively. The risk presented by such currency fluctuations is called foreign exchange risk or FX risk, and you have to factor it into your operations plans and your pricing. If you do not, your budgeting may go off track, you may not have enough cash to meet payment obligations, and you may even risk bankruptcy.

There are two major types of FX risk or FX exposure:

You can minimize your exchange risk by using tools such as the following:

These financial instruments (also called hedging tools) are complicated, and you should obtain experienced financial and accounting advice to determine which ones are best for your company. They will also cost you money, so be sure to build the required fees into your financial plans.

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