Argon 18 gears export sales growth toward emerging markets

Banks are basically looking for 3 things: they need to understand what the company needs the money for — so they are looking for a story or the big picture. Understanding where they company is going and how they intend to get there is crucial. They also want to see the financial statements to assess credit risk. Although numbers are part of the story, the financial situation of the company has to be presented in an organized way. They need to see it in black and white! Banks are also looking to know if a company is working with partners such as EDC which can provide a risk-sharing guarantee. These guarantees encourage banks to free up additional working capital because they know their risks are covered.

At its very simplest, it is a guarantee to the bank that they will get paid if its customer doesn’t pay. And what banks really love about it, is that it’s totally flexible. It can be used for everything from freeing up working capital, margining foreign receivables to covering work-in-progress payments or setting up an office or factory overseas.

Say for example your company is selling most of its production to customers in the United States. Your U.S. sales are booming and are you are planning to take your business to an emerging market next. You need more money to finance that growth so you approach the bank. But the bank might be a little uncomfortable with how fast you are growing and with the market where you want to sell to next. The answer is for EDC to provide a guarantee covering up to 75% of the amount of the money that you need to borrow, leaving the bank to carry only 25% of the risk. In some cases, our guarantees can go as high as 100%.

The fees are based on the company’s credit rating, how long the coverage is needed and the amount they need to borrow. The fee is calculated on the guaranteed amount and that can be paid either up-front or in quarterly instalments by the bank.

It’s standard international business practice now for your customers to demand that you post a bond (performance bond, bid bond, contract bond, etc.) in the form of a letter of credit before they will do business with you. But getting your bank to post a letter of credit ties up your working capital. Less working capital means you can’t take on new contracts or invest in your business. So what’s the solution?

We asked Sophie Dumoulin-Mondoux, Director of Contract Insurance and Bonding at EDC, for her views.

A bond is basically a guarantee, issued by your bank or surety company to your customer that is unconditional and payable on demand, which your customer can draw on if you don’t fulfill various elements of your contract. To protect itself, the bank requires collateral or freezes that same amount in your operating facilities.

EDC can provide banks with a 100% guarantee to cover the value of the bond. This means that your bank no longer needs to freeze your company’s cash that you could be using to take on new contracts.

EDC can set up what we call a facility to cover all of your bonding needs for the year based on what you forecast your needs are. It works basically like a personal line of credit where you draw down the amount you need when you need it. Because you have pre-approved coverage, it’s a streamlined process when it comes time to issue the guarantee and means you don’t have to wait until a customer asks for a bond; you can offer bonds up front which might tip the sale in your favour.

There is no set up fee. The rate for the guarantee is pre-set based on your company’s credit rating and how long the coverage is needed and you only pay for what you use, when you use it. This means it can be a no-cost solution because your related expenses can be built into your contract price.