Getting Ready to Export, Guide 2006 (Ontario)

8/8/2019 Getting Ready to Export, Guide 2006 (Ontario)

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Your Export

Guide

ExportGetting Ready to


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This guide has been designed to introduce

Ontario firms, particularly small and medium-

sized firms, to the fundamentals of export

success and the resources available to them.

Getting Ready to ExportExporting requires detailed thinking about the unique opportunities and challenges of

foreign markets. Every company, every product and every service has its strengths and

potential.This guide will help you analyse some of the key issues that you need to

consider and offers practical advice for firms new to exporting and those wishing to

expand their export programs.

The text is divided into two main parts: Part One focuses on how to and some of the

fundamental components of successful exporting; Part Two lists a range of resources

and organizations available to assist exporters. An Appendix provides further detailed

information.

There are numerous programs, services and networks that can help you build a

successful export program.

For more information please contact:

Trade Information Officer

Export Development Branch

Investment and Trade Division

Ministry of Economic Development & Trade

Hearst Block

900 Bay Street, 6th Floor

Toronto, ON M7A 2E1

Tel: (416) 314-8200 Fax: (416) 314-8222Web Site: www.ontarioexports.com


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G e t t i n g R e a d y t o E x p o r t

Exploring Our Export OpportunitiesThe opportunities for Ontario companies in the export market are immense.The

dismantling of trade barriers means that small and large companies alike are better able

to participate in the global marketplace.

Ontario exporters have already demonstrated that innovation, creativity and careful

marketing are key to giving their products a competitive edge in the global marketplace.

Ontario cars, phone networks, computer software and ready-to-eat entrees are all being

exported with great success. Ontario companies can build on these trading successes by

rigorously promoting their superior goods, skills and services to international customers.

Exporting requires detailed thinking about the unique opportunities and challenges of

foreign markets. Every company, every product and every service has its strengths and

potential. This guide will help you analyze some of the key issues that you need to

consider and offers practical advice for firms new to exporting and those wishing to

expand their export programs. The text is divided into three main parts:

Part IFocuses on how to and some of the fundamental components of successful exporting.

Part IILists a range of resources and organizations available to assist exporters.

AppendixProvides further detailed information.

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T a b l e o f C o n t e n t s

PART I Planning Your Export Strategy

1. Is Your Company Ready to Export?

1.1 Evaluating Your Strengths and Weaknesses ...........................................................................5

1.2 A Note to Service Exporters...............................................................................................................6

1.3 Export Readiness Evaluation..............................................................................................................7

2. First-stepExport Opportunities

2.1 Doing Business in the United States ..........................................................................................9

2.2 NAFTA Implications for New Exporters .............................................................................10

2.3 Exporting to the United States under NAFTA ...............................................................11

2.4 The Mexican and Chilean Opportunities ............................................................................12

3. Your Export Market Access Plan

3.1 Export Market Research Techniques .......................................................................................12

3.2 Preparing Your Export Marketing Plan ..................................................................................13

3.3 Export Entry Strategies .....................................................................................................................14

3.4 Strategies for Service Exporters ..................................................................................................15

3.5 Direct Exporting Options ................................................................................................................16

3.6 Exporting in a Changing World.....................................................................................................18

3.7 Indirect Exporting Options .............................................................................................................22

4. Selecting Your Local Sales Agents

4.1 Finding the Right Representative ...............................................................................................234.2 Evaluating Potential Representatives .......................................................................................25

4.3 Agency and Distributor Agreements ........................................................................................27

4.4 The Canadian Trading House Option ....................................................................................28

4.5 Working with Strategic Partners ..................................................................................................30

5. Export Pricing and Financing

5.1 Calculating Accurate Export Costs ...........................................................................................31

5.2 Pricing Considerations .......................................................................................................................32

5.3 Financing Your Export Program .................................................................................................34

5.4 Arranging Your Payment Terms ...................................................................................................36

5.5 Payment Tips for Service Exporters .........................................................................................38

6. Building Export Success

6.1 Your Business Trip ..................................................................................................................................38

6.2 The Export Contract ...........................................................................................................................41

6.3 Delivery: Containers, Carriers and Customs ......................................................................42

6.4 Managing Your Risks ...........................................................................................................................44

6.5 Export Success Checklist .................................................................................................................46

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P l a n n i n g Y o u r E x p o r t S t r a t e g y

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PART II Export Resources:Where to Find Help

1. Export Readiness Evaluation Software ...............................................................................47

2. Low-cost Market Research Aids ...................................................................................................47

3. Searching for Export Opportunities on the Internet ..........................................49

4. Alternative Export Financing

4.1 Export Credit Agency FinancingEDC .................................................................................53

4.2 Aid Financing ProgramsCIDA ..................................................................................................54

5. Ontario Government Support to Exporters

5.1 Export Development Programs ...................................................................................................555.2 Export Support Programs ................................................................................................................57

6. Federal Government Support to Exporters

6.1 Federal Trade Support Programs ...............................................................................................58

6.2 Program for Export Market Development ..........................................................................59

6.3 Virtual Trade Commissioner Service .......................................................................................59

6.4 Canadian International Development AgencyCIDA .................................................59

6.5 Canadian Commercial CorporationCCC .........................................................................60

6.6 The Export Development CanadaEDC .............................................................................60

6.7 The Federal Trade Commissioners ...........................................................................................61

AppendixA. Implications of FTA/NAFTA for Goods Exporters .....................................................63

B. Implications of FTA/NAFTA for Service Exporters ....................................................67

C. Case Study: Setting the Right Price .........................................................................................68

D. Sample Export Forms .........................................................................................................................73


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1. Is Your Company Ready to Export?The first step in determining whether exporting is a viable option for your company is

to review the strength of your business at home.

Successful exporters are generally those with an established base in Canada. They have

reliable production, excellent reputations for quality, and products that are in demand

in the domestic market and therefore, potentially in international markets. However,

some highly specialized companies that do little or no business in Canada have also

found a niche in foreign markets.

1.1 Evaluating Your Strengths and WeaknessesAny Ontario company considering entering the export market will have to assess its

strengths and weaknesses. Consider these eight key aspects of your business:

Part

1. management expertise

2. production resources

3. product design and ability to adapt

4. domestic market success

5. marketing skills

6. technology

7. financial resources8. people resources


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1.2 A Note to Service ExportersGiven todays computer technology and telecommunication linkages, there are many

very small service firms that are successful abroad in carefully selected niche markets.

But there are some different factors that service exporters need to consider to ensure

export success.

Because service exporting usually involves the movement of personnel across the

border, you need to become very familiar with immigration regulations and work

permit requirements.

You need to build credibility in the foreign market so that customers there will take a

chance on your service. Find opportunities to showcase your expertise, network with

local contacts, establish a profile in the mediain general, become visible. At least

initially, you need to be building the profile of your firm, rather than focusing on

advertising a particular service offering.

For professional service firms in particular, your top professionals have to do the

marketingnot a sales rep.

For many service exporters, attendance at trade fairs will not be time-effective.

Instead, you may need to find conferences, etc., at which to speak and build visibility.

In order to feel conveniently accessible to customers, many service firms need to

establish some form of a local presence.

Remember that services can be exported in several different ways:

providing a service from a Canadian base to a foreign country

(e.g., architectural drawings created in Canada for a foreign client)

traveling to the foreign country to deliver the service (on-site construction

project management)

providing the service to foreign clients in Canada (e.g., a training program

in Canada for foreign executives)

A strong domestic business base (usually).

A long-term commitment to exporting by top management.

An allocation of sufficient company resources and personnel.

A sound business plan with a realistic time frame for export market development.

A well-designed, consistently high-quality product/service that meets the quality and

performance standards applicable in the target export market.

A product/service that meets the often diverse requirements of foreign customers.

A product/service that sells at a competitive price and is delivered on time.

A product/service that can be fully supported with after sales service (if applicable).

Requirements for Export Success


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Marketing Expertise & Resources:If you are a small firm, do you have staff with marketing expertise?

Is your senior management and/or marketing staff skilled at marketing in other cultures?

Financial Resources:

Do you have excess growth capital to use for foreign market development?

Do you have enough financial resources to manage professional fee withholds at source

(for tax reasons) if applicable?

Are you financially equipped to increase production significantly?

Product Suitability & Certification:

Is your product suited for export? Can it be adapted easily to meet different cultural

preferences?

What are the characteristics of your product that provide it with a marketing advantage?

Can your goods be easily shipped? Can your service be delivered easily abroad?

Does your packaging meet international requirements?

Will you need to redesign your product (packaging, manner of delivery, etc.)?

Will you need to translate materials?

Is your product cost competitive?

Is your quality control up to international standards?

Are you ISO (International Standards Organization) certified and approved?

Can your product be modified to meet mandatory technical standards in foreign markets?

Will your product need to be certified by a foreign agency before being allowed

into the market?

Production & Communications Resources:

Can you increase production to meet a surge in demand?

Will your production facilities need to be certified by a foreign agency before your

product is allowed into the market?

Can you expand your telecommunications capabilities easily? Do you have a fax

machine and e-mail capability?

Do you have a strategy for accommodating different time zones and vacations when

using the phone?


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2. First-step Export OpportunitiesWhen thinking of doing business beyond Canadas borders, the best place to start could

be next door.The United States is Ontarios largest market for good reasons. Under the

Free Trade Agreement, the U.S. market is more accessible to Canadian exporters.

As part of the NAFTA, exporters might also consider exporting to Mexico. This could

prove an important first-step to approaching other Latin-American markets. As trade

agreements are constantly changing, so exporters are well advised to stay on top of the

latest developments.

2.1 Doing Business in the United StatesIt makes good sense to consider exporting to the United States. Many exporters find

this market an excellent opportunity for learning about the export business. As we share

the same language and a similar culture, breaking into this market may be much easier

for some companies than taking on cultural and language differences as well.

The United States is the worlds largest and richest national market. Our laws and

customs are similar. Today with the Free Trade Agreement and the North American

Free Trade Agreement, we have access to the best trade opportunities in the world.The

FTA/NAFTA provides Canadian goods exporters with a cost advantage over offshore

competition equal to the U.S. tariffs that these competitors have to pay.

Political and Cultural Distinctions

The U.S. market differs in structure from Canada, with four levels of government

(Federal, state, county, municipal). Entrepreneurship is strong, with a greater separation

between private and public sectors.With a portion of the American government being

elected every two years, Canadian exporters should be very aware of the American

political issues and their impact on specific economic initiatives and general openness to

dealing with Canadians.

The U.S. market is very competitive; these customers are used to lots of options,

excellent quality assurance, convenient access and rapid response times. Executives are

often quick to reach decisions and may be ready to make a deal sooner than

Canadians expect.

U.S. Marketing and Communications Tips

Ontario companies may find it of strategic benefit to have a U.S. telephone number

with a remote call forwarding feature to your office in Ontario or an 800 or 888 number.

These services can project the image of a local presence in the market without the cost of

a local office.There are also services available that provide a complete range of business

support services at reasonable cost such as mini-offices, a local business identity,

corporate representatives, (for the Certificate of Authority) warehousing and shipping.


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The competition for attention in the U.S. market is intense. Advertising and publicrelations can help promote Ontario products in the United States through trade and

consumer magazines and other media. Care must be taken to select media that reach

the required target market and that the product is presented as being as easy to buy

as a U.S. product.

Tax Implications

Canadian firms should be aware of the U.S. tax implications of doing business in the

United States. Generally, if you are exporting and do not have any physical presence in

the United States, you would not be subject to U.S. income tax. Also, be aware that

Canada and the United States have a federal tax treaty that basically gives credit for

taxes paid in the other country on taxes owing in the country of residence.

If a Canadian exporter is deemed to have a U.S. establishment, the firm will be liable

for U.S. federal corporate income tax. Exporters need to be aware that the definition of

establishment could cover a warehouse or distribution centre if there are employees.

If you are invoicing from a U.S. address, you will need a Certificate of Authority (or be

subject to a substantial fine) that names your local corporate representative. Such a

representative is a legal point of contact, not necessarily a marketing rep.You need to

verify such requirements with the nearest Canadian Consulate.The Canada-United

States tax treaty provides firms with many advantages and you should get some advice

from a U.S. tax specialist.

2.2 NAFTA Implications for New ExportersThe North American Free Trade Agreement (NAFTA), which came into force January

1, 1994, establishes one of the largest free trade areas in the world.The overall objective

of this Agreement is to extend the trade and investment enhancing provisions of the

Canada-United States Free Trade Agreement (FTA) to Mexico. It is possible that the

agreement could eventually form part of a wider trade initiative that would include

most of the countries of the western hemisphere.The Chile-Canada free trade

agreement, signed in 1996, was an important step in this direction.

Under NAFTA, Canada, the United States and Mexico will accord national treatment

to imports of each others goods and services and to investors, meaning that each

country will treat the goods and services of the other two partners as if they were

domestically produced and treat foreign investors as if they were nationals.

Here is a brief listing of key areas of benefit to exporters under this agreement:

temporary entry for business people

reduction of tariffs

qualification under the Rules of Origin

special customs duty programs

government procurement

settlement of disputes

investment


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2.4 The Mexican and Chilean OpportunitiesMexico is a country of 105 million potential consumers with an expanding middle-class

of around 30 million people (roughly the size of the Canadian market). It is a country

that has problems of infrastructure underdevelopment, transport and communication

difficulties, and pollution concerns.Yet, attitudes in Mexico towards free markets,

capitalism and privatization are changing.

For the Canadian exporter, Mexico will not be as easy a market to penetrate as the

United States. A different language and business culture will present barriers to those

who are not willing to learn and adapt. But for those Canadians willing to invest time

and energy, Mexico represents an export opportunity. For many companies, Mexico

will be their first non-U.S. export.

Some expect Mexico to be a stepping stone to the whole of South America.The Canada-

Chile free trade agreement was an important first step. There is the prospect of a much

larger unified trading market including the whole of South America. Canadian exporters

should recognize the need to get in early.

3. Your Export Market Access PlanAccess to markets varies from country to country and product to product. There is a

wide range of organizations and research tools available to shed light on possible market

leads. Careful planning will save you time and money.

3.1 Export Market Research TechniquesTo prepare properly for the export market, you should explore all the avenues available

to increase your knowledge of exporting. A number of government, educational, trade

associations and other private-sector groups operate export seminars and workshops.

Check with your local community college to see what full and part-time programs are

offered.The Export Development Branch of Ontarios Ministry of Economic

Development and Trade also supports a number of export education workshops

and programs.

A wealth of market research is available. Much of it can be accessed for little or no cost.

Extensive preliminary market research can be done from your own desk. Desktop

research calls for an inquisitive mind and an orderly collection and analysis of

information. This research can save you the price of a return trip to the export market

you are thinking of targeting.


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Low-cost Market Research ApproachesThere is a wide range of organizations and resources that provide exporters with an

inexpensive source of information on potential markets. For more information on the

organizations listed below, see Low-cost Market Research Aids in Part II of this guide.

Canadian Trade Commissioner Service

trade associations

major banks

CanadExport

Statistics Canada World Trade Database

major international trade fairs

International Marketing Consultants

When youre on holidays, search for sources of export and trade information. Perhaps

your vacation destination could be a market for your product.Would it not be nice to

have a business excuse to get there more often?

3.2 Preparing Your Export Marketing Plan

Analyzing Your Target Market

Your research will provide a better understanding of where the opportunities are and

what is needed to win the business of your target market.This understanding will

contribute to your potential for success when you visit your market destination.

To plan a winning strategy, take a look at your target markets:

customers

industry associations

trends

industry/sector events calendars

market differences

your competitors

export requirements

economic initiatives/priorities

market segmentation

An analysis of this market information will help you define export opportunities and

associated risks.This homework is an excellent investmentand it is cheaper than a

plane ticket to your potential market!


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3.3 Export Entry StrategiesExporting the finished good or service represents only one of several strategies for

entering foreign markets. Factors like high transportation costs or high tariffs could

mean your merchandise cannot be competitive in a foreign market. Other ways may be

open. Make sure that you explore all the strategies for bringing your goods to your

customers outside Canada. Apart from shipping finished goods, you can enter into

export markets by:

licensing designs or technology

investing in a branch plant

setting up a manufacturing joint venture in collaboration with a local firm

in the foreign market

Your strategy can differ from country to country and from regional market to regional

market.You could find, for instance, that you can easily sell your goods in the United

States, but that your transportation and product tailoring costs make it difficult to

export to Southeast Asia. A joint venture to manufacture in the region might make

more sense. Or a wholly owned investment in a foreign branch plant may best serveyour objectives in the region.

The best strategy for entering a market is one that makes your merchandise most

competitive in that market. Consider the following in assessing your potential to

compete in a target market:

tariff and non-tariff barriers

the cost of customizing the merchandise to meet local market requirement

currency fluctuations

transportation costs

Checklist: Key Elements of Your Marketing PlanOnce you have identified your market, you will need to organize the key elements of

your Export Marketing Plan. Use the guidelines below to help develop your plan.

Establish a competitive export price.

Ensure that you have high quality and technically accurate support documentation for your agents/

distributors in their language.

Give special attention to the selection, training, incentives and support given to your agent or distributor.

Arrange for your agents, distributors, and customers to visit your plant in Ontario, if appropriate, for

critical training in product application, after-sales service, etc.

Have your senior management visit the target market to confirm your commitment to the market and

your customers there.

Use major international trade shows to promote your merchandise and raise the visibility of your company.

Continue to monitor your competition.

Ensure on-going product and technology development.


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While adapting to the market of the host country could significantly increase costs, theresulting increase in volume may make it worthwhile. Additional business contributes to

the fixed costs of production even if the profit margin is relatively small.

Structuring Your Export Access Strategy

When structuring your export access strategy, make sure your management is in clear

agreement on:

company objectives for both the medium and long term

tactical approaches to entering the market

marketing plans to schedule activities that will support objectives and tactics

allocation of resources for one- to five-year commitment to establish a presence

in your target market

the export strategy may have to be modified to respond to changing conditions

and opportunities

3.4 Strategies for Service ExportersMarketing your services abroad is similar to strategies for expanding into another

Canadian province. Depending on your business, there are a number of ways to enter a

new market. In general, you will want to select ones where you can draw on personal

referrals rather than making cold calls.

One possibility is to respond to Requests for Proposals (RFPs) from organizations in

the foreign market or International Financial Institutions (IFIs) such as the World Bank

or the regional development banks. Ideally, you would want to be involved with the IFI

at the pre-feasibility stage when you can help shape the project to be funded.

Remember that when an IFI is involved, you will have two clients, the IFI and the

national government. The Canadian government has a representative at each IFI who

can help you in marketing your services.

Another possibility is to identify a need that is not being met and design a service to fit

that need. In this case, you will want either to have an almost guaranteed customer or

someone to invest in promoting the availability of the new service. In such an endeavour,

a local partner can be very helpful.

Tips for Setting Export Objectives

Short-term objectives: aim to establish a foothold in the market.

Medium-term objectives: establish your company as a supplier.

Long-term objectives: deal with making you a major supplier.


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It is much easier to be referred into the foreign market.To do this you will want to talkwith your present and former satisfied customers to determine whom they could refer

you. Similarly, you can talk to foreign students studying in Canada or recent immigrants

to Canada, about contacts they have in their home country to whom they could refer you.

The easiest of all is becoming so visible in the foreign market that potential customers

approach you.To do this, you will want to adopt strategies such as (Note: local here

refers to the foreign market you are targeting):

join a local business/trade association and become active on a prominent committee

volunteer as a speaker for a local trade association or business/professional school.

apply for and secure an award for excellence and then promote that award in the

local market

become a speaker or panelist for a trade event or professional conference in the

market area

develop and execute a virtually-free demonstration project

present an educational seminar on an industry trend of interest, linking the

presentation to what services you can offer

retain a media consultant and get articles placed in the local media about your firm

3.5 Direct Exporting OptionsExporting directly into a foreign market requires more skills than indirect exporting

because you must deal with many unknown factors.

Follow these steps to establish your representation in your target market:

prepare a list of potential agents or distributors

screen the candidates to arrive at a short list

interview those candidates who have been short listed

select your agent or distributor

establish an agent or distributor contract using a lawyer familiar with the market

provide technical and marketing support to your representatives

communicate with the agent/distributor on a regular basis

keep the agent motivated and informed about your merchandise

provide assistance to the agent in solving problems

Foreign Distributors

A foreign distributor orders goods and resells them to wholesalers, retailers or end usersin his own country at prices they set themselves. Distributorships are usually granted for

a specified territory and the distributor provides after-sales service and technical support.

Your distributor may also agree to develop a market for you with his or her sales force,

appoint dealers, and handle all promotions. If a distributor is appointed on an exclusive

basis, he or she receives sole rights to sell in a given territory. A distributor usually

handles a number of similar product lines.


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AgentsA sales agent (or representative) in a host country generally works on commission in an

exclusive territory.The agent seeks business, enters into legal contracts with the purchasers

on your behalf and conveys the purchase order to your Canadian base.You then ship to

the purchaser directly. In many instances, the exporter relies on the agents judgment

regarding credit risk. Agents often provide some collection support.

An agent may be an individual sales representative who works on his/her own in a

specialized product area, or may be a large manufacturer looking for a product to

complement its product line.

Agents may provide a variety of support services, including carrying stock, promoting

services, advertising and repairing goods.When selling through an agent, you have more

control over the market activities than selling through a distributor.

Another form of agent is a manufacturers representative. Selling via a manufacturers

sales representative is appropriate where there are more customers to be called on than

your sales staff can economically handle. Manufacturers reps usually carry very

focused, vertical product lines and have the advantages that they already know the

market and customers; you only pay them when they make a sale.

Direct Sales to Final Buyer

Direct sales to a buyer is ideal for technical products requiring technical service and

support.You must have the ability and resources to be involved in all aspects of

marketing and after sales service.When selling directly to a buyer, you retain a high

degree of market control. However, the marketing costs may be high.

Selling direct is appropriate when the depth of knowledge or expertise essential to sell

your products can only be provided by your own sales staff. It also might be appropriate

if you have relatively few potential customers or where your potential customers are

concentrated in a relatively small geographical area.

Foreign Broker

This is a firm or individual working on a straight commission as agreed to by you.

Brokers usually specialize in bulk commodities.They bring together a buyer and seller

and helping negotiate agreements or contracts.

Licensing Agreements

When an exporter is faced with prohibitive production costs at home, low-priced

competition abroad, transportation problems, or high tariff barriers, a licensing agreement

can be an alternative to market development. The holder of the license then produces the

product in the foreign country; finances and builds manufacturing facilities; and uses the

exporters trademark, patents, technical know-how, or training, in return for payment of a

royalty or fee. Franchising is another form of a licensing agreement.


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The main advantage of licensing is that market penetration can be achieved withoutdirect investment by the exporter. However, a disadvantage is that a licensee is a

potential competitor upon the termination of the licensing agreement.

Exclusive agreements on sales territory and rights may be included in a license. Laws

and regulations governing license agreements vary from country to country and the

licensers lawyer should review the foreign countrys regulations covering the types of

rights which can be licensed legally. Be sure to investigate your legal recourse to enforce

the foreign licensees agreement to pay the royalties and the legal if either party should

break the agreement.

Joint Venture

A joint venture is a step beyond licensing. Here, the exporter invests money along witha foreign investor or investors to produce the product in the host country. Joint ventures

entail many technical considerations and are often covered by special legislation.

Therefore, before entering into a joint venture, it is important to a lawyer with a

thorough understanding of all host countrys relevant laws.

3.6 Exporting in a changing worldThe U.S. offers vast market for Ontario exporters. While the similarities of language,

laws, standard of living and attitudes give Canadians a unique advantage over exporters

from other countries, they can also cause us to overlook the many ways in which the

two nations are different.

Canadian exporters must treat the U.S. as a market separate from Canada.The events

of September 11, 2001 and the resulting security measures have affected border wait

times, packing legislation, reporting requirements, travel many other export-related

issues.

If youre a Canadian citizen, theres no legal requirement for you to present a Canadian

passport in order to enter the U.S. However, given American security concerns it is wise

to acquire and carry one when you cross the border.Your drivers license or birth

certificate may satisfy an U.S. border official, but your passport is the only definite

proof of Canadian citizenship.

If you need a Canadian passport, you can contact the Canadian Passport Office at

www.ppt.gc.ca.

You can find additional information about the classifications and their related

documentation in two brochures published by International Trade Canada: Cross-

Border Movement of Business Persons at http://www.international.gc.ca/nafta-

alena/cross-en.asp and Temporary Entry to the United States: A Guide for Canadian

Business Persons at www.international.gc.ca/nafta-alena/temp_entry-en.asp.

The Foreign Affairs Canadas Canada-United States Relations website at www.can-

am.gc.ca, has links to many resources covering various aspects of the bilateral relation-

ship, including visas and immigration, border cooperation and politics, as well as trade.


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After September 11, 2001, Canada and the U.S. signed the Smart Border Declarationand Action Plan.This identifies initiatives that promote bi-national cooperation in

border security and management needed to ensure public safety and the security of

both countries economies.

Certain programs, such as the Free and Secure Trade program (FAST),

http://www.cbsa-asfc.gc.ca/import/fast/menu-e.html will provide exporters with

new options and new requirements.The FAST program is a joint Canada-U.S.

initiative involving the Canada Border Services Agency, http://www.cbsa-

asfc.gc.ca/menu-e.html, Citizenship and Immigration Canada,

http://www.cic.gc.ca/english/index.html, and the U.S. Bureau of Customs and

Border Protection (CBP). http://www.cbp.gov/.

FAST supports moving pre-approved eligible goods across the border quickly and

verifying trade compliance away from the border. It is a harmonized commercial

process offered to pre-approved importers, carriers, and registered drivers. Shipments

for approved companies, transported by approved carriers using registered drivers, will

be cleared into either country with greater speed and certainty, and at a reduced cost of

compliance. In Canada, FAST builds on the Customs Self-Assessment (CSA) program

and its principles of pre-approval and self-assessment, as well as increased security

measures under the Partners in Protection (PIP) program.

FAST includes aligning the requirements of Canada's PIP program and the U.S.

Customs Trade Partnership Against Terrorism (C-TPAT) program. As part of these

programs, companies will have to adopt and implement security procedures to be

compatible with guidelines set by both customs agencies.

FAST focuses on greater speed and certainty at the border and reduces the cost of

compliance by:

reducing the information requirements for customs clearance

eliminating the need for importers to transmit data for each transaction

dedicating lanes for FAST clearances

reducing the rate of border examinations

verifying trade compliance away from the border

streamlining accounting and payment processes for all goods imported by

approved importers (Canada only)

The Partners in Protection (PIP) program This program enlist industrys help in dealing

with terrorism, increasing border security, reducing smuggling and combating organized

crime. In Canada, PIP is managed by the CBSA. Companies that sign up for the program

give the CBSA a self-assessment of their security methods. In return, the CBSA will

help the business remedy any flaws in its security. PIP benefits companies through

faster movement of low-risk personnel and goods through U.S. customs, improved

security for the company and better understanding of customs requirements.You can

find out more about PIP from the CBSAs Partners in Protection web page at

www.cbsaasfc.gc.ca/general/enforcement/partners.


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Required documentation for formal entryYour shipment, if destined for formal entry, will require the following documents and

information:

Commercial invoice Also known as a business invoice, this must exactly represent the

content and value of your shipment. Never declare goods, such as promotional items or

samples, as being of No commercial value. U.S. customs officials may decide to

impose a value of their own or may even refuse entry of the goods. Another invoice tip

when using part numbers, provide a written description that will help classify the goods

for customs purposes. Also, be sure that each invoice also shows the total amount

charged to the buyer for the shipment; never use the net value.

NAFTA Certificate of Origin Determining the eligibility of goods for NAFTA treatment

and providing the importer with the Certificate of Origin is the exporters responsibility.

To claim NAFTA treatment, the importer must be in possession of a valid Exporters

Certificate of Origin from the Canadian exporter that certifies that the goods in

question meet the NAFTA Rules of Origin. Exporters can obtain copies from Canada

Customs and Revenue Agency offices in Hamilton, London, Ottawa and major border-

crossing points, or visit their website at www.ccra-adrc.gc.ca

Country of Origin Marking Rules

NAFTA marking rules are distinct from the NAFTA content rules.The marking rules

serve the domestic purpose of informing the ultimate consumer of a good where that

goods were made. In contrast to the content rules, which are common to all three

parties, each NAFTA member is required to establish its own set of marking rules.

The marking rules of each NAFTA country apply only to imports from its NAFTA

partners. Accordingly, the U.S. marking rules will pertain only to imports from Canada

and Mexico. Similarly, Canadas marking rules apply only to imports from Mexico and

the U.S.The NAFTA marking rules do not apply to exports or to goods that are

produced and sold domestically. Marking must be sufficiently permanent to remain in

place unless deliberately removed.

Importer ID Number Also known as the Customs Assigned Number, this is used by

U.S. Customs to establish bond coverage, release and entry of merchandise, liquidation,

the issuing of bills and refunds, and drawback processing.Your customs broker can help

you obtain the number or you can get it yourself by submitting Form 5106 to U.S.

Customs, available at forms.customs.gov/customsrf/getformharness.asp?form

Name=cf-5106-form.xft.

Bill of lading or airway bill Your freight forwarder, carrier or broker is responsible for

filling it out. A bill of lading isnt needed for mail shipments.

Entry manifest The carrier is responsible for filling this out. Again, this isnt needed for

mail shipments.


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Entry/immediate delivery This is used for time-sensitive shipments, such as freshproduce, and replaces the entry manifest.The carrier is responsible for submitting this

to U.S. Customs before the shipment arrives at the port of entry.

Harmonized System Tariff Classification (HS Code) Depending on the nature of the

goods, the shipment may also need to be accompanied by permits or licenses (if theyre

controlled goods) and a packing list.

Informal entry of goods

Your goods are considered an informal entry if their value is less than US$2,000, and

provided they are not controlled goods. Informal entry doesnt require a broker if the

shipment is accompanied by the exporter, or if the consignee comes to the port of entry

to collect it. Documentation for informal entry is less stringent than it is for formalentry.The shipment must be accompanied with its commercial invoice.You should also

include a NAFTA Certificate of Origin; while this isnt legally required by U.S.

Customs, providing one will smooth your shipments path across the border.

3.7 Indirect Exporting OptionsIndirect exporting is not as aggressive an approach to exporting as direct exporting, and

a firm may not be able to fully maximize the profit potential in foreign markets.

Brokers

An local export broker works on a commission basis, and is similar to an overseas agent

or broker. Usually a specialist in certain bulk commodities or manufactured products,

brokers are then in a good position to find buyers for those products in many areas ofthe world.

Trading Houses

Selling via trading house is appropriate if you do not have the resources to service a

distribution channel in the market; if an export market is relatively exotic and requires

cultural and market knowledge that you cannot readily acquire; or when you would

prefer not to become involved with exporting but would rather deal through an

experienced third party.

Trading houses are specialists in exporting. They undertake to market a firms product by

acting as a local export department for the firm. Trading houses may be both exporters

and importers.They are knowledgeable about their markets, know the customers needs,the communication problems in foreign markets, and the cultural problems in the market.

They usually handle packing, shipping, and documentation and thus relieve you of many

of the tedious tasks required for exporting. A trading house may buy products from you

outright and assume all credit and financial risks in selling abroad, or it may be retained

on a commission basis, acting on your behalf, with credit and financial risks to be shared

with you.

(Note: For more information on trading houses, see section 4.4 The Canadian Trading

House Option.)


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Make sure that the other product lines being handled by the agent/distributor are

compatible with your own and are non-competing.

Check out references from the agents clients and within the industry. Do they have a

reputation for performance and integrity? Banks and purchasers are obvious sources of

this kind of information.

Once you have a short list of candidate firms, you can begin interviewing. Use the

guidelines set out in section 4.2 Evaluating Potential Representatives in interviewing

your prospective representatives.

Examine the prospects principal players.

Tips for Selecting a Representative

Talk to other Canadian exporters in your industry with non-competingmerchandise.They may recommend agents/distributors in your target

marketbe sure to check them out yourself.

Participate in foreign trade shows. Not only is this an excellent way to test the

market for your goods but it will also provide you with opportunities to meet

agents who are seeking new lines. Be cautious though. The agent hungry for

new lines may not be the best agent. Many of the best agents are careful about

taking on new lines.

Advertise in the leading international sector/technology trade magazines.

Contact the local importers association or sector association in the target

market.They often can provide names of firms or individuals active in your

sector. Where feasible, ask the potential buyers of your goods which agents or

distributors they recommend.

The Canadian Trade Commissioner can be an excellent source of advice in

selecting representatives.The Commissioner may be able to conduct an informal

investigation into the performance and reputation of a potential representative.

Researching potential representatives will involve sending long-distance faxes and

follow-up telephone calls.The investment will be minimal compared to the

benefits.The time and money you put into screening potential representatives

pays off when you find the best possible representation for your merchandise.


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4.2 Evaluating Potential Representatives

Consider their experience and knowledge:

Does the prospective agent or distributorship have the know-how and resources to

provide after sales service at the quality level your company expects?

Who are the principals of the prospective agency or distributorship?

What is their background and experience in your field?

Are they active participants in the firm? If not, how important is this to you?

In some foreign markets the social and business connections of the principals can mean

far more to the success of your merchandise than a monthly marketing call.

Are they reliable and able to deliver:

Examine the prospects service record.

Can the prospect deliver the service promised in your existing guarantees and/or warranties?

Examine the prospects readiness to serve your needs.

Examine their facilities:

Does the prospect have warehousing facilities and a good shipping system?

Does the prospect have modern communications systems?

How many offices does the prospect have in the territory it would be covering?

Consider their existing customers:

Examine the prospects current and past customers.

Does the prospect represent lines that compete with yours?

Make certain that your agent or distributor has no conflict of interest in representing you.

Is the prospective agency or distributorship calling on the type of customer that would be

interested in your merchandise (i.e., is its target market the same as yours)?

What major accounts does the prospect currently hold?

Examine the merchandise lines the prospect represents.

Evaluate the staff and sales abilities:

Is the prospective agency or distributorship large enough to service your potential market?

How many staff members does the prospect have?

Is the staff that will be handling your business qualified?

Examine the prospects readiness to serve your needs.

Examine the way the prospect covers its territory.

Does the prospective agency or distributorship cover a territory directly or does it cover it

using regional representatives?

Is the size of the sales force large enough to serve the number of potential customers?


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Checklist:What to Expect from an Agent or Distributor

Thorough knowledge of the local, national markets and any variations.

Import knowledge of your product type.

No competitive products.

Ability to cover territoryurban and/or rural coverage.

Timely payment as per agreements.

Adequate warehousing of variable models or stock.

Sales organization and unrestricted access to sales records.

Administrative support.

Ability to prepare marketing plans and sales forecasts.

Market research and competitive analysis. Verify pricing assumptions and calculations.

Prepare advertising and promotional campaigns.

Clear understanding of the termination clause in contract.

Visits to production facilities for product updates.

Capability to provide accurate verbal and written translations.

Does the geographic distribution of the sales staff make sense? For example, in theUnited States manufacturers often have several agents across the country on a regional

territory basis.

Keeping Your Representative Motivated

It is important that you and your chosen representative have a clear understanding of

what each can expect from the other. Appointing an agency or distributorship to

represent your merchandise is only the first step in developing a customer base in your

target market. A successful long-term business relationship requires that you

communicate with your representative frequently.

Agencies or distributorships need to be kept up-to-date on your line. If you can, offer

their staffyour sales forcetraining and/or incentive to become and stay familiar withyour merchandise and its applications. Provide prompt and complete responses to any

questions your target market sales force has.Think of them as customers who must

be kept sold on your merchandise on a regular basis.


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Part Checklist:What Agents Expect from You Exclusivity in writing. Legal representation for patent and trademark protection.

Top-quality, trouble-free, warranted goods.

Commissions payable should be clearly spelled out in writing.

Shipping services: packaging, labels, documents.

Prices: lowest possible.

Payment terms: establish credit rating and patience.

Advertising and promotional literature and posters.

New and modified products.

Training materials: manuals, videos, slides.

Timely updates, announcements, newsletters.

Periodic visits from high-level executives.

Sales conference attendance.

Rewards and incentives.

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4.3 Agency and Distributor Agreements

Legal Factors

A prudent exporter will usually want a written contract with the agent or distributor.

The contract will set out the terms of the business and legal relationship agreed to by

the two parties.

Foreign and Canadian law affects agency and distributorship contracts in a variety of ways:

Certain formalities may be required to create and maintain legally enforceable

and binding obligations between the parties.

Provisions may be required to address imposed warranties, product liability,

business practices and other matters governed by relevant law.

Certain provisions may be automatically included in the legal relationship even

when not specified by the parties or unless specifically excluded by the parties.

Income tax laws may make one type of business and legal relationship

preferable to another. An agent or distributor could constitute a permanentestablishment making the Canadian exporter subject to the income tax

provisions of that country.

Relevant foreign and domestic law should be considered before deciding whether to use

an agent or distributorship. Look at the laws before defining the relationship between

you and your representative.The laws may have a large say in who sells your goods and

who imports them.

Foreign duties and taxes imposed on imported goods may vary according to the type of

business arrangement used. If you sell direct to the end user, duties and taxes may be

imposed on your selling price. If you sell to a representative or maintain an inventory in the

foreign market, the base for import duties and taxes will be different than the direct price.


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When determining the most suitable type of relationship, remember that you canusually choose which countrys law will be applied to interpret the contract, and

whether the courts or an arbitrator will be used to settle disputes.

When you are ready to draft a contract, the following points should be considered:

1. Define the merchandise to be represented.

2. Specify which present and future goods are to be covered by the contract.

3. Clarify whether or not the representative will have exclusive rights to distribute

your line in the territory.

4. Determine the length of the contract.

5. Define the circumstances under which the contract can be terminated.

6. Consider foreign laws requiring compensation to terminated representatives or to

representatives not granted renewal of the representation.

7. Determine which laws apply to your relationship.

8. Establish which countrys law will govern the interpretation of your contract.

9. Define the extent of the representatives signing authority for you.

10. State whether the representative is an employee or an independent contractor.

11. Who,by law, is responsible for product liability claims, compliance with business

practices legislation, and labeling and packaging laws?

12. Is there any provision for arbitration in your contract?

13. Define the territory. What are the boundaries of the territory that will be covered

by the representative?14. What exclusivity will be granted the representative or the exporter? Foreign laws

may limit exclusivity.

15. Define the terms of business.

16. Set out the terms of sale between you and your representative.

17. Specify the payment terms.

18. State the currency in which your business transactions will be settled, sales service,

advertising,writing quotations, collections.

4.4 The Canadian Trading House OptionCanada was founded by trading houses:The Hudsons Bay Company, The Northwest

Company and the French fur traders.Throughout history, it was not the manufacturers

of the goods that conducted trade beyond the city-state, but the trader.

But, in this day and age, would it be a logical step to use the services of a Canadian

trading house?

For some manufacturers the answer is yes.Trading houses can offer both new and

experienced exporters access to markets beyond their present management capabilities.

For the new exporter, not wanting to increase risk, trading houses can greatly increase

profit potential. It can do so without the inherent risks of entering foreign markets.

Trading houses can also assist the experienced company to reach non-traditional markets.


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The trader knows all the subtleties of international trade. It is not a sometime activityto be engaged in only when there is a glut in the inventory.The trader knows the local

language, local rules and regulations, how to move the goods into and through the

market.The trader can be cost efficient in a particular market area by carrying a

number of similar goods for a number of manufacturers. The costs are spread among

the goods.

A Canadian trading house is a company with one or more specialist traders and it is an

established company operating under Canadian law.

A trading house is an export and/or import specialist offering market intelligence and

commercial trading of goods that it does not produce, between two or more international

markets.

The range of services rather than size is the determining factor. A trading house must

have sound management, international communications, and trade support services

either in-house or readily available. It needs selectivity in goods handled and markets

served, and in representing specific lines it needs a close relationship with the

manufacturer. It could act as the export department of a manufacturer covering all his

merchandise, or only one or two items, into specific overseas markets.

The benefits of Canadian trading houses include:

specialized knowledge

extensive experience

cost effectiveness

minimum risk

Canadian customer

Canadian receivable

some or all markets

some or all goods

The Trading House as Your Agent

Canadian trading houses can operate in different ways.The simplest way is to be the

agent. As such the trader is a go-between, usually in complex, high-value projects.The

trader is plugged in to the market.That means the trader knows all the right people,

from the government ministries to the customs and shipping regulatory persons.

Frequently, the agent can handle most of the technical aspects of the item.This involves

negotiating and handling logistics of commercial business and shipping. In this

instance, the agent does not take possession of the goods. It follows that the

manufacturer is responsible for the goods and for payment procedures.The trader will

receive the commission once the goods are shipped.


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The other basic function is that of merchant. As a merchant, the trading house willpurchase goods at export prices from the manufacturer and take responsibility for

shipping and payment of the international receivable. The trading house will place an

order against a firm order from overseas while the manufacturer has a domestic

receivable.The trading house needs special export prices to make this feasible.This

merchant trader should not be confused with the trader who performs liquidations.

Selecting the Right Trading House

The sort of trading house that you will need for an on-going export commitment is a

steady trader who knows and understands the manufacturers goods.This trader has a

trusting relationship with the producer that is reciprocated.The trader knows overseas

markets, speaks the languages and above all this trader has contacts and knowledge.

The process for finding the right trading house involves the same techniques as the

search for a corporate lawyer or accountant. It is a matter of talking to the candidates.

Getting to know both the candidate and the operation means visiting the offices and

asking for a brief proposal.The choice should be based on the criteria outlined above.

Ask for references, both normal domestic trade references and overseas. Look for a

credible track record. Does the trader have the languages of the geographic area of

concentration? The trader who promises to sell any item in any market should get

specially close scrutiny.

You must decide what is the right trading house to complement goods in the target

markets. One trader may be skilled at handling specific merchandise in specific markets.Another could specialize with one item in one market. Several traders may have

strengths in moving different merchandise in different markets. Any combination that

works is the best choice for the manufacturer.

Ask MEDTs Export Development Branch, your industry association, the Canadian

Manufacturers & Exporters, or the Ontario Association of Trading Houses.Trade shows

are good places to let people know youre looking for some assistance. Recommendations

are sure to follow.

Note: GST and the Trading House: In Canada export trading houses that resell at least

90 per cent by value of their total annual purchases are permitted by Canada Revenue

Agency to issue to their suppliers a certificate to allow them to purchase goods on a

zero-rated basis. No further processing or alteration of the goods will be permitted in

Canada after the certificate has been issued.

4.5 Working with Strategic PartnersA strategic alliance with an appropriate local partner can reduce substantially the

time and money it will take for you to develop business abroad. A local partner already

has a network of contacts, knows the key cultural variables and can provide you with a

local office.


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Depending on your needs, you may wish to seek a partner in your same industry or ina complementary industry. For example, high-tech firms may find it useful to partner

with a local marketing firm.

Industry associations may be able to recommend local firms interested in foreign

partners. Similarly, the Export Development Branch of Ontarios Ministry of Economic

Development and Trade and/or the Canadian Trade Commission may have a list of

appropriate local candidates. Remember that local partners are also interested in

opportunities for themselves in Canada, so select a partner whose expertise can also

help you in your domestic market.

An alternative to foreign partners or going-it-alone is to have a Canadian partner.

MEDTs Export Development Branch, Industry Canada and the Canadian Chamber

of Commerce have been working together on developing a more formal business

network system to help Canadian exporters achieve competitive economies of scale.

5. Export Pricing and FinancingYour export success will depend upon bringing a cost-competitive good or service to

the export market. It must also be at a price that is profitable for the exporter. To help

determine that price, an exporter must first establish the actual costs for producing and

delivering the good or service to market. A key factor in establishing pricing is the cost

of financing the export program and the type of payment terms that are established.

5.1 Calculating Accurate Export CostsThe cost of manufacturing is never a mystery when the costs of materials, labour and

administration are known. Make sure you know all the costs involved in bringing your

goods to your foreign customers. An educated guess on costs is not enough. Precision

is needed as costs can change frequently. There is no single correct cost concept to

apply in all situations. Costs can be described most simply as the volume of dollars paid

to secure a good or service to be resold at a profit. Costs can be broadly classified into:

production costs such as raw materials and direct labour

factory overhead (burden) cost directly associated with production

(e.g., electricity, depreciation, etc.)

administration costs related to both manufacturing and selling

selling costs including warehousing, sales promotion, sales solicitation,

sales management, marketing, packaging and shipping

financial costs to conduct manufacturing, selling and administration


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The prices paid for cost inputs will likely stay the same over short periods of time butchange over longer periods.You must be prepared to reflect significant cost changes in

your pricing procedures.

Among the simpler tasks is keeping a record of material and labour charges in the

production process. More difficult, however, is keeping track of overhead costs.

All factory overhead (burden) costs must be added together and allocated on a

determined standard. Overhead costs that neither increase nor decrease for any

specified level of production must be considered. Property taxes, for example, must be

paid regardless of the number of manufactured units produced.

A number of methods exist to develop overhead costs. By far the easiest to use isrelated to the number of units produced.This is the formula that applies:

This method is accurate only when realistic figures are used.When calculating your per

unit cost, be sure to be realistic. Factor into your assessment:

the unavoidable idleness of people and machines

maintenance and repairs

machine set-ups

vacations

statutory holidays possible illness or labour difficulties

possible downturn in orders

Not allowing for these situations could mean unit costs for overhead might be too low.

Profits will suffer accordingly. Calculating these factors into your projected cost and

production output will expose opportunities for improvement.

5.2 Pricing ConsiderationsTo determine your export price, use a careful, step-by-step pricing system. Each export

order should be considered individually. Reducing costs can help to gain an advantage

even in highly competitive markets.You could gain a market edge by providing best

price available. Beware, however, that anti-dumping laws in the country where theexports are destined could be a factor in your pricing policy. It pays to know the rules

before offering best prices available.

Note: There are several methods for calculating costs and prices. See the Case Study:

Setting the Right Price in the Appendix of this guide for a commonly used pricing

method.

Estimated Total Overhead

Estimated Units of Production= Overhead rate per unit


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In pricing your service, you need to take into account both what the market will bearand what your break-even point is.Your price needs to include hidden communication/

transportation costs and other non-domestic expenses such as possible currency fluctua-

tions prior to the end of the contract. If the payments are sizable (over $35,000 at a time),

one of the chartered banks will offer you hedging options so that you can reduce your

exposure if the client is paying you in a currency other than Canadian dollars.

Pricing for Payment Withhold

If the country requires a certain percentage (usually between 15 to 30 percent) of your

professional fee be withheld at source for tax purposes, you will need to build into your

price your cost of capital or else find a local presence option to avoid the withhold. As a

result of tax treaties signed by Canada with various countries, you will eventually be

able to recover the withheld amountbut that could take up to 18 months.

Note: GST is not applicable on foreign sales, though it may be applicable on the

portion of the work performed in Canada for a foreign client.

Goods and Services Tax

The Federal Goods and Services Tax (GST) is collected at a single rate (7 per cent) on

virtually every transaction of goods and services throughout the production and

distribution chain. Most producers, distributors and exporters pay GST on business

costs can claim it for refund. This means GST should not be included in your company

expenses or in your profit and loss statements. It should be accounted for and shown as

a separate balance sheet account.

Most companies are now familiar with the accounting for GST. You should note that

exports are considered a zero-rated supply (sale). This means you do not collect the

GST on the amount charged on exports, but you may claim an input tax credit for the

GST paid on virtually all your inputs (purchases).

You are required, however, to have proof that the supply (sale) went out of Canada to

support your claim for not charging tax on an invoice.The proof must enable depart-

mental officers to track the entire shipment of tangible personal property from its origin

in Canada to its destination outside Canada.The responsibility to maintain this

evidence of export rests with the registered supplier (vendor). For this reason you will

need to keep any:

invoices

purchase contracts

transportation documents

customs brokers invoices

import documentation required by the country to which the goods are exported

For more detailed information get GST Technical Information Bulletin, B-062Export

Documentation from your local Canada Revenue Agency Office.Visit the Canada

Revenue Agency web site at. http://www.cra-arc.gc.ca/menu-e.html


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Ontario Retail Sales TaxThe Ontario Retail Sales Tax should not apply to the sale of goods shipped outside

Canada by the exporter if the details of such shipment are supported by suitable

documentary evidence. The Ontario Ministry of Finance may be contacted for further

information at: 1-800-263-7965 or www.gov.on.ca/FIN/hmpage.html

5.3 Financing Your Export ProgramOften export prospects can be enhanced by financing the transaction. Among the factors

to examine are:

credit availabilities to both customer and supplier

relative interest rates for different currencies and amounts

competitive pressures

the appetite of financial intermediaries (usually banks)

Discussions with potential financiers should start early in the marketing phase.

Committed financing offers may be required at the time of submitting prices and

technical information. In trade finance, normally your goal and that of your bank

should be complementary.

Short-Term Financing

Letters of Credit

Letters of credit (or documentary credits) are issued by a bank at the request of an

importer, in favour of a supplier/exporter, for the purpose of financing the import of

goods and/or services. By opening the documentary credit on behalf of the importer,the bank obligates itself to pay the exporterprovided the exporter complies strictly with

the terms of the credit. This eliminates any risk to the exporter arising from the

customers failure to pay for the shipment. At the same time, the issuing bank provides

financing (credit) to the importer. It pays the importers obligations to the exporter

after which it will, in turn, be repaid by the importer.

Collections

Collections consist of bills of exchange (or drafts) which are defined in the Canadian

Bill of Exchange Act as an unconditional order in writing addressed by one person to

another by the person giving it, requiring the person to whom it is addressed to pay on

demand or at a fixed determinable future time a certain sum in money to or to the

order of a specific person or to the bearer.

Open Account Transactions

Selling on open account is arguably the easiest way to finance exports since this

arrangement incurs minimal costs to the exporter and involves little paperwork.

Goods are delivered to the customer, an invoice is issued and the customer pays within

a stipulated period. Open account transactions are typical in domestic business. In

international trade, however, they can be highly risky.The one area of international

trade where they are common is in transactions between Canada and the United States.

The exporting party must finance the transaction with its own funds until it receives

payment from the purchaser.


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Purchase of Foreign ReceivablesAn exporting firm can convert its foreign receivables into immediate cash by selling

them to a bank or factoring house.The receivables are discounted by an amount

deemed to cover financing charges and risks.The purchaser then assumes responsibility

for the commercial and political risks underlying the transaction as well as for collecting

payment from the foreign customer. Selling its foreign receivables provides the exporter

with the advantage of immediate cash, credit risk protection and collection services.

Such advantages are not free.The discount applied covers the costs of these services,

reducing the revenues that find their way to the exporter.

Medium and Long-Term Financing

Medium-termed instruments are usually structured for repayment periods of up to five

years.The repayment of long-term instruments can range between five to 16 years.

Such instruments are usually issued by banks or financial institutions, often in support

of large projects. In issuing such instruments, the financial institution assumes the risk

of non-payment arising from the failure of the customer, the customers bank or

political instability in the customers country. Among the longer term financing

mechanisms, the following are the most used:

Forfeiting

Forfeiting or forfeit financing is a medium-term form of seller or supplier credit

provided by a number of Canadian banks.The bank purchases medium-term (up to

five, and in special cases, seven-year) promissory notes due to the Canadian exporter

from a foreign customer.The value of the promissory notes is discounted at a fixed rateso that the exporter receives cash, after deduction of the interest charge or discount.

Usually provided with a guarantee from the customers bank, the promissory notes are

discounted by the Canadian bank on a non-recourse basis to the exporter.

The Canadian exporting firm benefits from passing on the credit risk and currency

exposure to the Canadian bank, turning a credit sale into a cash transaction, receiving

fixed rate financing, incorporating the financial cost in the contract price and

eliminating extensive documentation.

Buyer Credits

A buyer credit is a method of financing an export over the medium to longer term

whereby funds are loaned directly to the foreign customer. These credits are usuallysuited to large financing of capital goods and to support turnkey projects. Buyer credits

generally are on a non-recourse basis to the exporter as the importer enters into a direct

financial relationship with the lending bank.


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Export LeasingCanadian chartered banks can provide export leasing services through subsidiaries.This

form of trade financing is usually undertaken by exporters working in conjunction with

a leasing company to gain a competitive edge. It can be used for exporting to countries

where import restrictions prevent the customer from purchasing foreign equipment

outright or where the tax regime favours leasing over outright purchase.

Export leasing is usually a medium to long-term means of financing. Depending on the

mechanism used, the exporting firm receives cash for its transfer of title to the leasing

company and the delivery of the capital equipment to the customer. The leasing

company then collects regular payment from the leaseholder.

Project FinancingProject financing secures payment for a sale out of the cash flow that the project is

expected to generate when it comes into production.The assets of the project serve as

collateral, and lenders also have recourse to the cash flow created by the project.

Such loans are usually longer term, require extended gestation periods before

completion and require innovative financing. Canadian charter banks, through their

International Trade and Merchant Banking Divisions, are experienced in arranging

project financing, particularly for the mining, energy, forestry, transportation, public

utilities and engineering industries.

Financing through Export Development Canada

Export Development Canada (EDC) is Canadas official export credit agency. EDCsmandate is to promote Canadian exports by providing insurance to exporters, financing

foreign customers of Canadian goods and services and guarantees to banks in support

of export trade. EDC financing helps Canadian exporters by providing funds to foreign

customers who otherwise might not be able to make the purchase and by assuming the

repayment risks in place of the exporter.

5.4 Arranging Your Payment TermsGetting paid is proof of success in exporting. The best proof of all is getting paid

promptly. Exporters who have to wait unduly for payment are the ones who suffer

a loss of profit.

Specialized expertise is required for an exporting venture.There are a number of

factors affecting export payments that do not usually apply to domestic sales.These

affect the time it takes to receive payment, which in turn may affect your financing of

your export program.

Be aware that exporting involves additional distance and time between you and your

market, your transactions involve more than one currency and legal system, and

Canadian banks do not formally finance foreign receivable (except from the United

States). Consider the following methods of payment:


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Cash In Advance (Prepayment)When the customer pays cash in advance, the exporter receives a partial or full payment

before the goods are exported. This method is risk free to the exporter but extremely

risky for the importer. It is normally only used in paying for goods or services that are

scarce and in high demand.

Bills of Exchange and Drafts

These are documents handled by the chartered banks that state the total value of the

goods exported and the date of payment.They are addressed to the importer and require

payment on demandor on a fixed or to be determined datea specified amount of

money to, or to the order of, a specified person.The title to the goods is not transferred

until the payment is made.There are two types of drafts: a sight draft and a time draft. A

sight draft requires a customer to pay at sight, i.e., on receipt, while a time draft is for a

specified time after receipt.

Letters of Credit

Letters of credit are the most common method of payment in international trade as

they provide protection to both parties involved in the transaction. They are issued by

the international department of a chartered bank, usually that of the exporter and state

all the terms and conditions that the exporter must meet before collecting the specified

amount. If the conditions are met, the bank promises to pay the exporter. Letters of

credit specify the documentation needed for customs clearance as well as details of any

other terms associated with the sale (e.g., packaging changes or translated literature).

A letter of credit may be revocable or irrevocable. Irrevocable letters of credit are

preferable because they cannot be canceled unilaterally and therefore greatly reduce the

risk of non-payment.The exporter can also ask the bank that will be transferring the

funds, usually the exporters own bank, to confirm the letter of credit.This means that

the bank guarantees payment upon the fulfillment of the terms of the agreement by the

exporter. This confirmation provides additional assurance that the exporter will be paid.

Open Account Trading

This method is primarily used between companies that have a long-standing trusting

relationship or when billing within the same firm. It is also common in transactions

between Canada and the United States.Trading an open account consists of issuing

invoices once the goods have been shipped, exactly as is done in domestic transactions.With this method, the exporter assumes all of the risks and because of the absence of

any negotiable instrument to document the sale, collection difficulties can occur if the

customer refuses to pay.

Consignment

When goods or services are sold on consignment, the exporter retains ownership until

they are sold.The seller is responsible for the financial burden and risks (i.e., risk of

default and damage to goods). This method of payment is usually only used for goods

that are risky or not very popular.


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Countertrade and BarterCountertrade is a trading arrangement in which a sale to an importer is conditional on a

reciprocal purchase by the exporter. Instead of being paid in cash for a shipment, the

exporter would receive products (or even certain kinds of services) from the target market.

The governments of developing countries often require trade deals to include

countertrade arrangements because countertrade enables them to protect foreign

exchange reserves;

Getting Ready to Export, Guide 2006 (Ontario)

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Transcript of Getting Ready to Export, Guide 2006 (Ontario)