Finding Treasures in Your Balance Sheet

Finding Treasures in Your Balance Sheet

Part 2: Leveraging your assets with guarantees

Credit insurance may provide all the cash you need to operate abroad. But if it won’t, have you hit a wall?

Not necessarily. Many Canadian exporters use a solution that works for both them and their banks—EDC’s Export Guarantee Program (EGP). Under this program, EDC can issue an EGP guarantee to cover the financing you require, and this can allow your bank to provide additional credit—through purchase order financing, for example.

“We sometimes see situations where a company has a wonderful opportunity in another country,” says RBC’s Matthews. “But although it has the purchase order in hand, it doesn’t have enough working capital to support the new contract. In this case, the solution may be purchase order financing, which helps a company access money earlier in the business cycle. This isn’t something a bank might be able to handle on its own, but with EDC to help, we may be better positioned to finance this type of work-in-progress. Once we have an EGP guarantee in place, we may have more comfort around the project or transaction ahead of delivery, which means we can potentially provide financing against the purchase order.”

And because the EGP is so flexible, it’s not limited to purchase order financing. Here are just a few examples of how you can use an EGP guarantee:

  • Obtain a larger operating line. This could be an increase to your existing line, secured by your foreign receivables or other assets.
  • Margin your foreign offshore inventory. If you have inventory offshore, you may be able to borrow against a percentage of its value.
  • Obtain a capital expenditures loan. If you need to make capital investments in your company, an EGP guarantee can allow your bank to advance the money.
  • Obtain a loan to finance a foreignan acquisition abroad. If you decide to enter a foreignan international market by acquiring an asset there, but need financial help to do so, an EGP guarantee may make a bank loan possible.

Preserving your operating line

Finding more credit capacity isn’t the only financial challenge an exporter may face. In some situations, you may need to avoid a decrease in your credit capacity—for example, when your sales contract requires you to provide an international customer with a performance guarantee.

In these cases, your bank will issue a guarantee on your behalf, usually as a standby letter of credit (LC) for a percentage of the contract amount. Before it will do so, however, the bank will require you to post collateral to cover the value of the LC. Banks often obtain such collateral by freezing part of the company’s operating line, which will effectively shrink your access to credit.

You can avoid the LC’s collateral requirement, however, by using an Account Performance Security Guarantee from EDC. Under this arrangement, EDC will provide your bank with a 100 per cent guarantee for the LC’s value. This means the bank will no longer need collateral, so you can carry out the contract while retaining full access to your operating line.

Talking to your bank

While EDC can help you work with your bank, it’s ultimately your job to convince the bank to lend you the money you need. According to Greg Matthews, following these Here are seven basic tips guidelines for will help you makemaking your case:

  • Before you approach your bank, understand what it will and won’t finance. Banks are typically in the business of providing working capital and rarely lend for purposes such as marketing and R&D.
  • Help your bank understand your business—where you’ve been, where you are now and where you want to go.
  • Be specific about how much you want to borrow, why you want to borrow it and precisely how you intend to use the money.
  • Show that you have a regularly updated business plan and that this plan lays out a strategic direction for your company.
  • Demonstrate a reasonable level of financial and business sophistication in your overall operations and in your use of professional experts such as lawyers and accountants.
  • Show that you’re investing in the business for the long term, not for short-term profit.
  • If your bank is reluctant to lend you money because the loan seems too risky, suggest asking EDC for help.
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