Financing Your Transaction

Many institutions offer transaction financing for exporters. Because your services are invisible and intangible, you, as the exporter, will have to build a strong case to obtain your financing. It is important for you to be familiar with a range of institutions, and the export finance and insurance facilities offered by each of them. Quite frequently the exporter will start by working with bank staff more familiar with domestic transactions, and lacking experience in thinking of exports in any context other than physical products. The exporter often finds that he/she has to inform bank staff about their own export support facilities.

Throughout this series, the term " transaction financing" is applied to situations in which the supplier can:

• identify the client and provide information on previous transactions with you or other local suppliers
  
• identify reasonably accurately the service or services to be provided
  
• define how the service will be delivered (at the client’s site, by the client coming to you, or remotely)
  
• identify who will undertake the work
  
• define when the work will start and end
  
• explain how the client will pay and what the schedule will be

Issues in Financing a Transaction

Although transaction financing is far less complex than project financing, and should be easier to access than financing for company start-up or expansion, exporters face a number of challenges when working with their commercial banks, and with government programs. These are particularly noticeable for service exporters due to:

• commercial banks’ reluctance to accept foreign receivables
• commercial banks’ reluctance to lend against receivables rather than physical assets
• commercial banks’ lack of understanding of exports, except in the few "international clintres" of each bank
• commercial banks’ lack of understanding of knowledge based industries, except in a small number of branches
• lack of awareness, by bank staff, about the specialized services they do offer
• government programs being described as if only applicable to exporters of goods even when they are applicable to services exporters
• eligibility criteria for government programs being based on manufacturing capability rather than on business performance
• exporters not being well enough educated about the full range of bank and government programs and therefore not being able to direct bank staff or government officials to the appropriate contact within their own organizations
• exporters not being well able to describe their needs and to "sell" their capability

Financing Market Development for a Transaction

a) Self-financing

The market development that leads to a requirement for transaction financing is most often financed by the company itself, increasingly in cooperation with other companies through consortia or business networks. When considering the use of government programs, estimate the cost of your time to access the program. Also be aware that the funds available are based on the program’s definition of "eligible costs" and you may incur costs that are necessary, but not eligible.

b) Corporate Financing

If the anticipated market development costs are higher than you can afford, or are higher than can be justified by the anticipated business return, consider comparing this market with others which could give you a better rate of return on your marketing investment. If you still see good reasons for developing this market, look at the possibility of working with other consultants to increase the pool of market development funds. This will also help you to increase the range of services you offer, increase the scope of work you could perform, and ensure that the personnel most competent in market development are assigned to that task, thus leaving technical experts available to provide services and earn income.

Bid and Performance Bonds

a) Private Sector

When discussing export financing with your financing sources, also seek advice on financing whatever bid and performance bonds you may have to provide. If you are working as part of a business network or consortium, it may be possible to spread these costs among all members who will benefit from any resulting contracts.

b) Canadian Commercial Corporation (Canadian only)

The Canadian Commercial Corporation is a Crown Agency of the Government of Canada. It provides a service not available to exporters from any other country in that it can act as a "contractual bridge" between you and your client. You (and your commercial bank) have the security of the Government of Canada as your client. Your foreign buyer has the security of the Government of Canada as its supplier. This security can, in many cases exempt the Canadian supplier from the need for bid and performance bonds. This in turn, can allow you to be slightly more competitive by eliminating these costs from your proposal pricing.

Transaction Payment Procedures

a) Full Payment

In the simplest of exports, you provide the service and, with no delay, your client pays you in full. Complications may start in any of the following circumstances:

• you have to incur costs (research time, travel costs, accommodation costs, staff support, etc.) before you receive payment
• your client wishes you to extend credit beyond the time you can comfortably accommodate within your own cashflow
• your client wishes you to complete all the work but you wish to receive progress payments as you reach certain milestones within your terms of reference
• you need payment to cover your normal operating costs between when you start work and when you will receive payment

You can either arrange to receive "bridge financing" in anticipation of receiving payment from your client, or your client can obtain "importer financing" from which to make payments to you, the exporter. Increasingly, clients expect the arrangement of "importer financing" to be organized as part of the exporter’s proposal.

Whether for exporter financing or importer financing, difficulties may be encountered in arranging the financing due to:

• lender’s lack of understanding of the value of service exports
• lender’s lack of willingness to accept export receivables as security

To overcome these problems the exporter must be able to:

• refer the lender to their own programs covering exports of services
• provide comfort to the lender in the form of a guarantee or insurance of the receivable.
• provide the lender with evidence of the reliability of the client

Most importantly, the exporter must be willing to prove to the lender the value of service exports and the eligibility of such sales for acceptance as valid receivables. If you are a small exporter you may wish to encourage your lender to phone EDC’s hotline at 1-800-850-9626. If you are a large exporter, your lender could call 1-888-332-3320 to obtain information about EDC’s services to Engineering and Consulting Services firms and their lenders.




b) Progress Payments

Progress payments on export receivables is common with small contracts. If you anticipate incurring major expenses before being paid, you may wish to arrange for a mobilization payment and, depending on the size of the contract and your level of comfort with the buyer, for progress payments.

Information is available about assistance with financing through the International Financial Institutions, and the United Nations Agencies. Refer to the Sources of Assistance icon for more information.

Possible sources of financing:

• Commercial Finacial Institutions
• Development Funds - African Development Bank
• Project Finding - The Caribbean Development Bank (CDB)
• GEF Trust Fund - Global Environment Facility (GEF)
• Canadian Technical Cooperation Program (CANTAP) - Inter-American Development Bank (IDB)
• Trade Development - Japan External Trade Organization (JETRO)
• Loan and Guarantee Policies - North American Development Bank (NADBank)
• Technical Assistance Program - North American Development Bank (NADBank)
• Near Market Loans - International Bank for Reconstrction And Development (IRBD)
• International Development Association (IDA)

Financing a Transaction for your Foreign Client

In this instance, financing is provided to your client, and you are paid from this source. Arranging for such financing is a requirement in an ever greater number of situations whether a major project or a simple transaction is involved.

If both you and your client are well established and well known to your banks, and if you can convince your client’s bank that you will, in fact, deliver the service as contracted, your client may be able to obtain financing to cover at least a portion of the cost of your services.

The Export Development Corporation and the International Financial Institutions are excellent sources of information and assistance.

Possible sources of financing:

• Financing - Export Development Corporation (EDC)
• Project Finding - The Caribbean Development Bank (CDB)
• GEF Trust Fund - Global Environment Facility (GEF)
• Inter-American Development Bank (IDB)
• United Nations Development Programme - United Nations (UN)
• UNDP Consultancies and Technical Assistance Information - United Nations (UN)