As an exporter, you know that success in foreign markets depends very much on having a healthy supply of working capital. And like most companies doing business internationally, you turn to your bank when you need financing for your overseas operations. But if your business volume starts to expand rapidly, or you begin taking on bigger contracts or investing in assets abroad, your working-capital needs may turn sharply upward.
The question then becomes: how do you get the cash that will allow you to continue your growth? Here are several common answers:
- Obtain a larger operating line from your bank. This could simply be an increase to your existing general line. Or it might be a new line tied to a single contract or to multiple contracts, perhaps secured by the value of your product inventory or work-in-progress. Depending on your bank’s estimate of your borrowing capacity and the value of your security, this could be the most straightforward solution.
- Margin your foreign receivables. Your bank may already be margining your domestic receivables, so why wouldn’t it do the same for your foreign ones? Answer: It may, although many banks are reluctant to do this because foreign deals have a higher risk of non-payment.
- Margin your foreign inventory. If you have inventory offshore, you may be able to borrow against a percentage of its value. But again, your bank may be uneasy about issuing credit against overseas assets because of the higher risk involved in doing so.
- Margin your R&D credits. If you have an R&D department and get tax credits for its expenditures, you can ask your bank to margin against these credits. However, some banks consider this too risky.
- Obtain a capital expenditures loan. If you need to make capital investments in your company—to expand your Canadian production facilities to meet new demand, for example—you might approach your bank for this type of financing. If the amount is within your borrowing capacity, you’re probably good to go.
- Obtain a loan to finance a foreign acquisition. Suppose you decide to enter a foreign market by purchasing an asset there. You’ll probably want your bank to help finance the deal. This can work if you have enough borrowing capacity and/or if your bank will accept the offshore asset as security.
You can see the pattern here. You may get the working capital you need if you have enough unused borrowing capacity, or if you can provide security your bank will allow. But suppose you need more credit than your bank is willing to issue, no matter what you offer? This can happen even if you’ve never been refused additional credit before, and even if your foreign business is doing well. It all comes down to the level of risk your bank is willing to accept. So if the bank says “Sorry, no,” have you hit a wall?
Not necessarily. Many Canadian exporters have found themselves in this situation, and discovered a solution that worked for both them and their banks—the Export Guarantee Program (EGP) from Export Development Canada (EDC).
- Under the EGP program, EDC can issue a guarantee to cover the financing you require, and this can give your bank the confidence it needs to extend more working capital for your operations abroad. And because the EGP is so flexible, it can support many different financing scenarios—including the six we’ve just looked at.
An EGP guarantee can be instrumental in turning a potential deal into a real one. This was the experience of FourQuest Energy, an Edmonton-based services firm that provides the oil and gas industries with pre-commissioning, commissioning and maintenance services for facilities such as refineries.
“In 2010, we were pursuing our first international project, which was to pre-commission a refinery in Kazakhstan,” says company President Nik Grgic. “The contract’s value was large and comparable to our entire annual revenue at the time, so we needed a loan to buy the equipment for the job. What made the loan possible was EDC’s Export Guarantee Program—without the guarantee the program provided, we never could have raised enough money to do the project.”
So if your company has export-related activities or foreign investments, and needs more working capital to grow, be sure to take a look at the EGP. To learn more about it, you can watch a video Trade Talk video with me and my EDC colleague Dominique Bergevin, or download EDC’s detailed EGP product brochure.
Ever experienced challenges in scaling your business because you didn’t have enough working capital? How did you overcome those challenges? Share your experience and comments with the community!