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Top export financing solutions for Canadian entrepreneurs

Understand trade finance tools to succeed in international business

7-minute read

Canadian exporters make more money, grow faster, stay in business longer and are more productive and innovative than non-exporters. To take advantage of international opportunities, your business can prepare by understanding and using trade tools designed to help finance export growth and mitigate risk.

“The first thing exporters need is a solid business plan that includes an international growth strategy,” says Amesika Baëta, Senior Account Manager at Export Development Canada. “An export plan helps you understand how your business is structured and what available resources you have. It determines where you should spend money, identifies opportunities and foreign markets for growth, and outlines how you will compete internationally.”

“Your lender will value that you have a framework for international growth,” says Baëta.

Financing your export growth

Growing internationally generally entails important upfront investment. You may need cash for travel, or fees for distributors, agents, legal services, international manufacturing, licensing of products or intellectual property, or money to hire more people. There may also be costs associated with bidding on new projects. Doing your due diligence and having a plan prepares your business for growth. Securing working capital before you make your first international sale is an important consideration.

There will come a point when you want to take your business to the next level and you need working capital to finance that growth, especially international growth.

International payment terms

Even if you expect to start selling right away in a new market, you may not immediately get paid for your goods or services. To be competitive as an exporter, you may consider extending payment terms to your international customers, allowing them to pay after a shipment or service is delivered. This can affect the working capital you need to finance your international growth.

Working capital

Most companies hope to generate cash flow with payments they receive from sales, using that money to pay suppliers for materials, services or inventory, and as working capital for business expansion. But expenditures and payment terms in international trade can lengthen cash flow cycles and challenge growth.

“There will come a point when you want to take your business to the next level and you need working capital to finance that growth, especially international growth,” says Baëta.

A line of credit can help you keep cash flowing through your business and fuel your international growth.

A term loan is another solution to invest in productivity, increase inventory, boost export capacity, purchase equipment or simply give you a cushion to await payments from customers.

Companies can be reluctant to take on debt, but working capital is often needed to capture new business opportunities outside of Canada.

Government of Canada funding

There are many government programs available to help you access working capital without a debt or equity requirement.

“It’s worth looking into grant programs each year, determining your eligibility and applying,” says Baëta. “Government grant programs are there to offer additional financial support to Canadian companies through their growth journey.”

Canada’s Trade Commissioner Service, for example, offers funding for Canadian businesses selling overseas or entering new markets through the  CanExport program. Companies can access up to $75,000 for costs associated with an international market development project.

There are also export funding programs available to women and Indigenous entrepreneurs, for specific industries, and through local trade associations or chambers of commerce.

Purchase order financing

Companies sometimes secure an international contract, only to realize late in the process they need working capital and face a potential cash crunch.

Purchase order financing is a trade finance tool that can help businesses access working capital for a specific purchase order. It allows companies to finance up to 90% of the costs required to complete their purchase order while they await payment from their customer.

Purchase order financing can be very flexible. For example, the loan can be structured so companies only pay interest during the term of the loan, with a one-time balloon payment due at the end of the term.

If purchase order financing isn’t available from your financial institution, factoring is another option. With factoring, a third-party financial institution buys your international purchase order and the receivable, in exchange for a percentage of the anticipated amount. Factoring companies normally charge a flat fee up front, and often require your international accounts receivable to be insured.

Credit insurance

Credit insurance allows you to insure your accounts receivable to mitigate the risk of non-payment. There are many reasons a payment may not come through, including customer bankruptcy, foreign currency fluctuations, political hostilities, or economic changes in the market where you’re selling. Your customer may simply not pay. Credit insurance can be customized to insure one or two customers, or your entire portfolio of domestic and foreign business.

Your lender may also place higher value on insured foreign accounts receivable when considering you for a loan, which could help you access more working capital when you need it.

Documentary letters of credit

A documentary letter of credit, commonly known as a letter of credit, is a form of payment between a buyer and seller, brokered by their respective banks. The buyer’s bank, (issuing bank), promises to pay the seller for goods or services, provided the seller presents all documents outlined in the letter of credit to their bank (advising bank).

There are two primary benefits of documentary letters of credit.

A secure form of payment

Documentary letters of credit reduce the risk for both parties. Buyers and sellers work with their respective banks to complete the transaction. The buyer is assured that the seller will be paid once the terms and conditions of the letter of credit have been met. The seller is not obliged to ship or provide services until the letter of credit is issued.

To boost working capital

With letters of credit discounting, your bank purchases a documentary letter of credit from you before the formal process of your foreign contract is completed. Although you may not receive the full amount, you can access working capital to complete your contract without going to a third party for a loan.

Back-to-back letters of credit allow a company to be paid by a letter of credit, which they then use to secure the issuance of another letter of credit. You (the seller) can use the buyer’s letter of credit to purchase goods or subcontract work necessary for the completion of your contract.

“These are other ways companies can use bank instruments to help with their cash flow,” says Baëta.

Letters of guarantee

Also called a standby letter of credit, a letter of guarantee is an on-demand bank instrument. It can be issued directly by your bank on your behalf to a beneficiary, normally your buyer or supplier. Banks require collateral to secure the issuance of a letter of guarantee. But it can be useful in international interactions. A company can offer a letter of guarantee to your buyer to help you secure a deposit or guarantee your performance on a contract, for example.

“At EDC, we encourage exporters to use letters of guarantee as a tool in their toolbox to help win new business, establish creditability and be more competitive internationally,” says Baëta.

Performance security insurance

A letter of guarantee is an irrevocable bank instrument and can be called by the beneficiary at any time for any reason.

“If there was a strike at a port, or a foreign government decides to cancel an export permit suddenly, even if you have done everything you were meant to do, you can be at risk of a loss if your letter of guarantee gets called,” explains Baëta.

With performance security insurance, companies can mitigate the risk of loss by insuring up to 95% of the letter of guarantee.

Export guarantee

An export guarantee can be used by established companies that need access to working capital to fund their international growth. EDC’s program shares risk with the client’s financial institution to boost lending capacity.

Common sources of financial stress when exporting

Establishing a presence in the market

This could include in-person meetings or establishing a paid contract with a local distributor or agent. If you are bidding against other companies for a contract, you may be required to post collateral, have a surety bond or a standby letter of credit in place.

Licensing and registration of intellectual property

Depending on your business, you will need to be aware of local laws and ensure you are compliant.

Extending credit to buyers

When selling internationally, you will be expected to offer buyers generous payment terms, which means extending credit. Waiting for payments can affect your cash flow cycles and tie up your working capital.

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