Editor’s note: Suzanne
and I finally met at the FITT conference held in Toronto. I’m
pleased that ConnectUs can continue to provide relevant and
timely information on the exporting and finance. EDC is an important
partner when it comes to international business development.
Trust Yourself; All Others Get Credit Checks
Given these complex and often turbulent economic times, few
smaller businesses are eager to seal a deal with a handshake
any more. It pays to be careful, especially when you are selling
to a foreign buyer who is an ocean -- or even a border -- away.
But, increasingly, buyers want more time to pay. So how much
credit can you afford to extend, and how do you check their
credit before you ship the goods?
While a buyer may seem to be secure and reliable, the company's
internal difficulties may not be so obvious. The U.S.,
for example, recorded some 35,000 business bankruptcies in 2003,
and many small businesses are still reeling from the collapse
of customers who were high profile, multi-billion-dollar corporations.
Even so-called "cash sales" -- cheques, credit-card
payments and letters of credit from a foreign bank - carry risks.
For example, it could take up to three weeks for a Canadian
bank to clear a foreign cheque; a cardholder could still repudiate
a transaction; and a foreign bank in financial difficulty could
fail to honour a letter of credit.
According to credit managers, here are some of the questions
you should consider: What are your buyers' payment habits -
do they normally pay promptly? Does the buyer have any outstanding
lawsuits? Is the enterprise a holding of a corporation that
is in financial trouble? And, in this post-Enron world, what
is the reputation of the company officers and their track records
in terms of previous business success or failure?
So, why provide credit at all? There are some
distinct advantages to your bottom line. These include increased
sales, since customers managing their own cash flow often buy
more if they can delay payment. In addition, new customers may
be attracted to try your goods or services if you offer a credit
plan. All told, higher sales add to your market share and profits.
The most compelling reason, however, is that selling on credit
has become the business norm internationally, and Canadian exporters
often have to match their American and European competitors'
The solution is to extend credit wisely, and protect
your accounts receivable. You should always check a
company's credit information before providing your goods or
services. We recommend that you also obtain trade references
and a credit report from a reputable business information service.
While there is no precise formula for evaluating a company,
most credit managers look at the "4Cs: "Character
(management experience, willingness to pay, etc.); Capacity
(management practices; company efficiency..); Capital (financial
performance; available assets...); and Conditions (country and
industry's economic climate, and more).
But even if foreign buyers have the best of intentions, external
factors or local economic conditions may cause them to become
temporarily cash strapped. As a result, more and more exporters
are choosing not to go it alone, and turn instead to accounts
receivable (credit) insurance, which covers up to 90% of a loss
due to non-payment. This lets small businesses free up time
and resources to focus on the real bottom line: sales and profits.
Determine your foreign buyer's credit profile before
you close a deal.
Export Development Canada helps Canadian businesses expand
their sales internationally and ensures they get paid for them.
A Crown corporation, EDC provides trade finance and credit insurance
services for its Canadian clients, 90 per cent of whom are small
and medium-sized enterprises. To reach EDC, contact 1-866-297-1255
or visit www.edc.ca/smallbusiness.