Exporters and their banks know that it’s riskier to do business abroad than at home. Because of that risk, many Canadian companies can’t obtain enough credit to grow their international operations past a certain point. But the solution to their financing problems may be right in front of them—in their balance sheets
Suppose you’ve been exporting for a while and your existing level of credit has comfortably supported your business abroad. But now your international sales are increasing sharply and you’re clearly poised for growth—if you can get the money to support it.
But when you ask your bank for more credit, you run into a problem. The risk of non-payment is higher with international sales, and the bank knows that if you don’t get paid, your bigger credit line might be more than you can handle. The bank (reasonably enough) is uncomfortable with this, so it’s unwilling to provide the financing you need. And this means you can’t seize your new opportunities.
Or does it? The answer may lie in your balance sheet, in the form of assets that can increase your available credit. These assets can be international or domestic and can include your receivables, inventory, real estate and equipment. If the bank can find a way to take them into consideration, it may be able to provide the additional financing you need.
Turning your receivables into cash and credit
Canadian banks routinely margin domestic receivables to finance their clients’ business. But when it comes to margining against foreign receivables, the higher risk usually makes them more cautious. So what do you do if borrowing against your domestic receivables is no longer enough, but your bank is uncomfortable with lending against your international sales?
The answer may lie in receivables insurance. These policies are designed to protect you against non-payment by customers abroad, but they can also increase your borrowing power. Why? Because when you insure a foreign receivable, you’ll get paid even if your customer defaults. This reduces your bank’s margining risk, so it may now be willing to lend against the receivable.
“It’s common for banks to margin up to approximately 75 per cent of bank-approved Canadian accounts receivable,” says Greg Matthews, Commercial Account Manager, RBC Royal Bank. “For international, bank-approved accounts receivable, the percentage varies with the market. For the United States, for example, it’s typical to margin up to 75 per cent of receivables, while in European countries such as the U.K. and Belgium, it’s up to 65 per cent.”
Those percentages, of course, may not provide all the working capital a business needs. “But,” says Matthews, “if the company uses EDC’s receivables insurance to insure the international sale, we may be able to increase our margining to as much as 90 per cent of the receivable. Suppose you’re selling to the United States, where we already margin 75 per cent, but you need just a bit more working capital. In that situation, EDC insurance could help you access an extra 15 per cent of the receivable, which could be enough to fill the financing gap.”
EDC credit insurance Accounts Receivable Insurance has the potential for increasing an exporter’s credit limits by insuring up to 90 per cent of a company’s losses from a wide range of commercial risks. It may allow your bank to include your foreign receivables when determining your credit limits.
Come back on September 4 to learn about leveraging your assets with guarantees.