Such firms are not necessarily large businesses—many small to medium-sized Canadian enterprises (SMEs) are discovering that investing abroad can have many benefits, including:

• Getting better access to foreign markets
• Increasing sales and market share
• Serving customers better
• Joining new global and regional supply chains
• Gaining access to new technologies and resources
• Reducing vulnerability to downturns both in Canada and internationally

Investing abroad: the basics

There’s no one-size-fits-all approach to CDIA, but in general it includes some or all of the following steps.

A word of caution first, though: foreign investing is complicated, so you should always obtain assistance from reputable experts throughout the process.

Consulting professionals in your target market is especially important, since they will be familiar with local investment, legal and tax requirements and can help you avoid expensive mistakes.

1. Decide whether CDIA is for you:

CDIA may or may not be a good bet for your business even if you’re already exporting. Ask yourself questions such as: Does it fit my international business strategy? Do I have the resources to set it up and sustain it? Does its potential outweigh the risks involved? If the investment isn’t a good idea, now is the time to find out.

2. Find the best market:

If you’re already doing business in a particular market, investing there may be the logical next step. If you’re looking to invest in a new market, research it very carefully and, as mentioned earlier, consult local experts about its foreign investment climate. Some countries encourage incoming investment but others can be less hospitable.

 3. Choose your investment approach:

Three of the most common approaches to CDIA are as follows:

• You set up a foreign affiliate by establishing a new business in your target market. Depending on your company, this could be as modest as a small sales office or as ambitious as a full-scale manufacturing plant. Regardless of size, the affiliate is wholly owned by your Canadian firm but operates as a local company with respect to regulations, laws and taxes.
• You acquire a foreign business. To do this, your company invests in the foreign firm by purchasing its shares and/or assets. To qualify as CDIA, however, the investment has to be large enough to give you significant influence over the foreign company’s activities. If you acquire 100 percent of the foreign company, of course, you have complete control over its operations, and have effectively acquired a wholly owned affiliate without building it from the ground up.
• In a merger, you establish or already have an affiliate in the target market. You then combine that business and a local company into a new firm that owns the resources of both companies. Both the original businesses disappear and your new firm continues as their successor. As with an acquisition, the new business functions as a wholly owned affiliate of your Canadian parent company.

4. Choose your investment and carry out due diligence:

At this point, you decide where to put your money—into an affiliate, for example, or into merging with or acquiring a local company. Before going ahead, though, you absolutely carry out due diligence. This can range from financial and credit checks to looking at local foreign-investment rules. Again, professional help will be indispensable.

5. Make your investment:

This is where you sign contracts and pay out money. The importance of getting the contract right can’t be over-emphasized, since it will help you avoid difficulties that can range from language issues to tax problems.

You should also be aware that the way contracts are negotiated in North America or Western Europe can be very different from the way it’s done in other cultures.

For both these reasons, you’ll need trusted local counsel to help you manage the process successfully.

6. Protect your investment:

Whenever you have assets in another country, you’re implicitly accepting some level of risk. You can reduce this by careful planning and scrupulous due diligence, but there may still be residual hazards that are out of your control. You can protect yourself against them by using various types of insurance, which can cover risks ranging from expropriation to breach of contract.

Want to learn more about investing abroad? Watch a video with me and Dominique Bergevin, and then visit EDC’s Invest in Foreign Markets pages.

Have you ever invested abroad? In which markets did you invest, and what was your experience? Share below!

The post Six steps to investing abroad appeared first on Trade Ready.

Asia, for example, is now responsible for a third of the world’s GDP, while Africa has seven out of ten of the planet’s fastest-growing economies. And South America’s middle class is expanding by leaps and bounds.

For Canadian businesses seeking growth, such developments are very promising. At the same time, though, these new markets can be risky for the unprepared.

The single most serious hazard is not getting paid, for reasons that can range from a customer’s bankruptcy to a government’s imposition of currency controls.

Make sure you get paid during international trade

Your first line of defence against this danger is to effectively manage credit risk.

If you’re clearly aware of your foreign customers’ creditworthiness, as well as local political and economic conditions that may affect their ability to pay, protecting your receivables will be a lot easier.

Here are seven basic ways to lower the risk of not getting your money.

1. Thoroughly check a new customer’s credit record.

Finding foreign corporate information can be tricky, especially for emerging markets. Local consulting firms may be able to help, and you can also get assistance from the Canadian Trade Commissioner Service office.

2. Use that first sale to start building the customer relationship.

Your number-one tool for managing a customer’s credit risk is building a long-term, trusted relationship.

This can obviously take years to fully achieve. But start laying the groundwork by discussing your credit terms with a new customer before you extend credit. This will help you gauge the customer’s attitudes to credit, and ensure that they clearly understand what you expect of them.

Also consider using a “master sales agreement” with a new customer, rather than relying on purchase orders to set out credit terms.

3. Establish credit limits.

To set a credit limit for a new customer, you can use tools such as:

• Credit-agency reports, which can provide comprehensive information about a company’s financial history.
• Bank reports, which should give details of the bank’s relationship with the company, the company’s borrowing capacity and its level of debt.
• Audited financial statements, which can provide a good view of the business’s liquidity, profitability and cash flow.

4. Make sure the credit terms of your sales agreements are clear.

A sales agreement that includes well-worded, comprehensive terms of credit will minimize the risk of disputes and improve your chances of getting paid in full and on time.

5. Use credit and/or political risk insurance.

The Receivables Insurance Association of Canada provides useful information about insuring your company against non-payment.

If you decide to insure, EDC offers a full suite of insurance products that can protect you against non-payment, contract cancellation, breach of contract, expropriation, currency restrictions, political violence and more.

But make sure the factoring is on a “non-recourse” basis, which means you’re not liable if the customer defaults.

7. Develop a standard process for handling overdue accounts.

Your chances of collecting on a delinquent account are highest in the first 90 days after the due date.

If you have an established routine for dealing with late accounts, you can start the collection process as soon as you know there’s a problem.

How does your company manage credit risk and safeguard against non-payment? If you have other tips, share them with us below!

Want to learn more about how to manage credit risk? Watch a video featuring my colleague Dominique Bergevin and myself. Or download EDC’s white paper on Dealing with Credit Risk.

The post 7 Ways to manage credit risk and safeguard your global trade growth appeared first on Trade Ready.

Fluctuating rates also mean more guesswork in your budget forecasts, and they can make it harder to know exactly how much you’ll get paid when you complete a contract.

But that’s not all, according to Jean-François Lamoureux, a Senior Underwriter at EDC.

Remember that your bank wants to see good margins, accurate business forecasts and healthy cash flows before it issues credit.

“If you can’t offer these things because of poor FX risk management, it may curtail your ability to obtain the term financing you need. This can cause your growth and competitiveness to suffer,” he says.

Conversely, good FX risk management can bring your company the following benefits:

• Better protection for your cash flow and profit margins
• Improved financial forecasting
• More realistic budgeting
• Deeper understanding of how FX fluctuations affect your balance sheet
• Increased borrowing capacity, leading to faster growth and a stronger competitive edge

Create your own FX risk management program

These are all excellent reasons to take a hands-on approach to FX risk management. And while setting up a solid FX risk management program isn’t trivial, it’s well within the reach of any company willing to make the effort. To create your own program, you’ll need to take the following steps:

1. Analyze your business’ operating cycle to identify where FX risk exists.

This helps you determine the sensitivity of your profit margins to FX fluctuations and the stages of your operating cycle where you need protection.

2. Calculate your exposure to FX risk.

This covers both unconfirmed risk (the risk that exists before a sales agreement is finalized) and confirmed risk (the risk that exists after a firm sale is completed but you haven’t yet been paid). Once you know your level of exposure, you can decide how much risk coverage (“hedging”) you need.

3. Hedge your FX risk.

Hedging simply means that you use specially designed financial instruments to lock in the FX rate so that it remains the same over a specified period of time.

There are numerous ways to hedge, but as an exporter you’re most likely to use an “FX facility,” which you’ll obtain from your bank.

An FX facility resembles an operating line and can support various types of financial instruments (or “hedges”), all of which are designed to secure a specific exchange rate for an export contract so you won’t get any surprises at payment time.

4. Create an FX policy and follow it.

In this step you establish the FX risk criteria, procedures and mechanisms that will support your FX risk management program, and implement this policy across the company.

5. Don’t let hedges squeeze your working capital.

The essential advantage of a hedge is that it protects your profits from unfavourable movements in the FX rate.

The drawback is that your bank will want security for any FX facility it issues to you, which it will usually carve out of your operating line. This will leave you with less working capital, which is never a good thing.

There’s an EDC solution designed for just this situation: the Foreign Exchange Facility Guarantee (FXG). An FXG provides a 100 percent guarantee of the security your bank requires for providing you with an FX facility. Once the guarantee is in place, the bank won’t need to take the security from your operating line, which means you’ll have full access to your working capital.

The view from the front line

Normand Faubert is President of Optionsdevises, a Montreal consulting firm that for 20 years has helped exporters deal with their FX issues. In his view, a business that wants to take control of its bottom line and profit margins will follow carefully designed strategies for managing its FX risk.

“EDC’s FXG is a great tool for this since companies can sometimes be very tight for cash,” he says. “By providing guarantees, EDC can help them obtain the financial tools they need to hedge their FX risk, while avoiding any restrictions on their credit and thus on their working capital.”

Want to learn more about managing your FX risk? Watch a video with me and my EDC colleague Dominique Bergevin, then download EDC’s (whitepaper download) Managing Foreign Exchange Risk with EDC Guarantees and EDC’s guide to Building a Foreign Exchange Policy.

Have you ever had your bottom line diminished because of fluctuating exchange rates? What steps did you take to diminish your future risk?

The post Five steps to managing your foreign exchange risk appeared first on Trade Ready.

Any good contract protects you and your customer when you do business together. But when you start selling abroad, you have to think about your sales agreements in a different way. In this post, we’ll look at six strategies for writing solid contracts that will help you avoid problems with foreign customers and governments.

1. Get the language right

Make sure you and your customer agree on the language to be used in the contract and on the meaning of each clause. If the contract is in English, but your customer wants a native-language translation, both contracts must specify which version has legal precedence. If the non-English version is to take precedence, have your legal counsel verify that the intent of the translated contract agrees exactly with the intent of the English one. If there’s a dispute, you don’t want your customer to claim that a clause wasn’t properly translated.

2. Check for compliance with laws and taxes

You’ll be asking for trouble if you don’t have your contract reviewed by legal counsel familiar with local laws and taxes. For example, suppose you send personnel abroad to install products you’ve sold to a foreign customer.

Because you’re working in the customer’s country but your firm is non-resident there, you could get hit with large, unexpected taxes when it’s time to get paid.

So be sure to get competent advice on local tax laws before you finalize your contract, and include clauses that will protect you. The same applies to laws and regulations related to things like customs clearance, labour codes and technical standards.

3. Don’t litigate—arbitrate

If you get into a serious disagreement with a foreign buyer, do your utmost to avoid litigation in a local court, since this will usually put you at a severe legal disadvantage.

You’ll be much safer if your contract specifies that any disputes will be sorted out through arbitration.

Your contract should also state that arbitration will take place in a neutral country. This is to ensure that the arbitrators won’t be swayed by local interests.

4. Don’t deliver to the door

In most overseas markets, you should deliver your goods only to the port of entry and no farther. If you agree to move them within the buyer’s country, you’ll be at the mercy of unfamiliar and possibly unreliable logistics systems, and will be responsible for damaged goods or late delivery. In addition, your customer should accept full responsibility for getting your goods across the border, including dealing with customs, obtaining import licences and paying all taxes and duties.

5. Nail down “acceptance”

In any sale where customer acceptance—and thus payment—depends on the product’s specifications or performance, put a “deemed acceptance” clause into your contract. This should tie the acceptance of the goods to specific conditions or events, never to something as vague as “customer satisfaction.” That kind of ambiguous wording can give some buyers an excuse to keep you dangling because they’re not “satisfied.”

6. Protect yourself from contract risks

What if a customer cancels your contract without just cause? Or a buyer goes bankrupt? Or your key import permits are revoked? To protect yourself from risks like these, you can use insurance solutions from Export Development Canada (EDC). EDC’s solutions can cover all these hazards and more, from a customer’s refusal to accept your goods to a political upheaval in your foreign market. The bottom line: with the right EDC insurance in place, you’ll get paid even if your customer doesn’t come though.

Want to learn more about managing contract risk? Visit EDC’s website to download your copy of ABCs of International Contracts and watch a video with me and my EDC colleague, Dominique Bergevin. We also have a webinar coming up on May 6, so be sure to register today.

The post 6 ways to lower risk when selling to foreign customers appeared first on Trade Ready.