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Exporting from Canada: Insuring Your Goods

By Michelle Collins |

After major time and effort, you are finally ready to seal that first big export deal. All that's left is to kick back and watch the money roll in. Not so fast. Have you thought about what happens if your customers go out of business or if they simply refuse to pay?

Guarantee peace of mind
You have already invested a lot of time and money in your exporting venture, so the last thing you want is to lose your sale to uncontrollable or unplanned-for circumstances. You can find help: the Export Development Canada (EDC) offers Accounts Receivable Insurance. With this product, you can insure 90 per cent of your shipment.

"Most small business exporters want something that's fast, inexpensive, and simple," says Andrew Douglas, the EDC director of small business. When you call the EDC, an underwriter will talk to you and assist you with a phone-based credit check on the buyer.

five highest risks involved in exporting

1. Default
2. Bankruptcy
3. Rejection
4. Call on a Bond
5. Contract Termination

Pay for that peace
Before you can get the insurance, you will be required to register as a policyholder with the EDC. In addition to paying an administration fee, you will be required to declare your total export sales to EDC-approved buyers. From this figure, a premium rate will be determined. Cash sales don't have to be included in these figures.

Three factors determine premium rates. The first is the country to which you are selling. "Different countries have different risk profiles. It really depends on the credit conditions in that country," says Douglas. If you are not able to collect on your sale due to sudden political uprising, however, you are entitled to collect on this insurance. Second is the type of goods exported. Different goods have different risk profiles. Consumer goods tend to have a higher risk factor than raw materials such as wheat. The third factor involves the credit terms. "It has been our experience that we have more problems with people asking for longer payment terms," Douglas says.

Better than crossed fingers
Douglas says that insurance provides three advantages. Firstly, "the exporter knows he's going to get paid. If he doesn't get paid and he's uninsured, it's very difficult for him to collect in another country; it's expensive and it really isn't worthwhile for that type of amount, so it's especially beneficial to small businesses."

The second advantage, and perhaps the most desirable, is that the receivable becomes a bankable asset. If you find yourself short of cash while waiting for the payment, you can take the policy to your bank and use it as a bankable asset to get a loan. "Essentially, they can collateralize the insurance and access an operating line of credit that they might have not been able to do otherwise. Banks will rarely, if ever, lend money against a foreign receivable to a small business where the amount is very small like that," Douglas explains.

Thirdly, the insurance provides a risk management advantage. A competitor might approach your buyer and offer the same goods at a longer payment term. You could decide that you want to match the terms, but you need money to operate your business in the meantime. "If it's insured, he has that confidence he's going to get paid down the road; he is also able to borrow against it. In many cases, he can offer a competitive term or match the term of the competitor and continue to keep that businessperson as a client."

Nonpayment: what to do
The billing date has come and gone, but you're empty-handed. If the buyer has gone under, you can call the EDC and have your claim processed immediately.

If you haven't been paid for another reason, you will have to follow a series of steps before collecting on the insurance policy. "First of all, try to collect the money, because lots of times people just don't pay by the due date on an invoice," says Douglas.

Failing a successful collection, your next move is to contact a credit bureau. The EDC and the bureau will help you collect the funds owing.

Still can't get your money? Four months after the invoice has been issued, you are eligible to file a claim and collect on the policy.

Export insurance is definitely worth the premiums, especially for a small business that cannot afford to tie up capital. "It's peace of mind and the ability to access working capital that they might not have been able to access in the past without an insured receivable," says Douglas.

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