Guide: Spotlight on export financing

On this page

• Export finance
• Collection methods
• Canada's trade programs
• Unified approach
• Cash flow solutions
• Contracting support
• Insurance and guarantees
• Funding opportunities
• Be export ready

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.

Export finance

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.

Collection methods

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.
  1. The exporter sends his/her bank shipping documents after the shipment has left.
  2. Once the bank has these documents it will send them to the importer's bank with payment instructions.
  3. The importer then pays his/her bank for the documents which will allow them to claim the incoming shipment.
  4. The importer's bank then pays the exporter's bank who forwards the funds to the exporter.

• 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.
  1. The importer arranges an L/C with his/her bank.
  2. The importer's bank prepares an irrevocable L/C which includes specifications as to how you'll deliver the goods.
  3. 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.
  4. 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.
  5. 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.
  6. The importer's bank pays your bank that then pays you

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.

Unified approach

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.

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.

Contracting support

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.

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.

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.

Products:

• 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.

• 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.

Funding opportunities

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.

Programs:

• 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.

• 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.

Be 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 and 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 (PDF format)
• 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
  • Export Financing
  • Government grants and financing
• Canadian Commercial Corporation (CCC)
  • Is CCC right for you?
  • Have a Government procurement lead? Share in full commercial confidentiality
  • G2G Exporter Resources
• Export Development Canada (EDC)
  • Need business financing to expand globally? Tips you can bank on
  • 3 types of political risks and how to manage them