no holding back

							              NO HOLDING BACK MEANS GLOBAL BUSINESS SUCCESS
Business practices that may work well for your business during good economic
conditions may be dragging down your bottom line now that the economy has
contracted. Here are some alternatives to help protect your cash flow.
Holdbacks hampering your business success?
Holdbacks are typically found in businesses that export equipment (and in domestic
transactions too) – the buyer generally withholds a portion of the payment, to cover
installation, quality and/or warranty issues. Only after the buyer has the equipment
tested and finds it satisfactory, are these holdback funds released.

If you operate a business where holdbacks are common, you may find yourself drawing
on your credit line to buoy up your working capital, as holdbacks can represent a
significant amount of money. Using your credit line can increase your financial costs –
not perhaps the best use of this funding source.

A cost-effective alternative to drawing upon a line of credit: ask your financial institution
to issue retention or warranty guarantees to substitute for any holdbacks, so that these
funds can be released to you.
Customer insolvency risk?
If you’re selling mainly or solely to one foreign buyer, you face a “concentration” risk,
should your one buyer become insolvent for any reason. A standby letter of credit,
issued in your favour by the buyer’s bank, would offer you increased security.

A standby letter of credit guarantees a predetermined amount of money; if your buyer
defaults on their credit terms, you can be paid for the goods you’ve already shipped, up
to the amount guaranteed by the standby letter of credit.
Foreign exchange fluctuations affecting profit margins?
If you’re working with buyers in the U.S., ask them to pay you in Canadian dollars to
remove the risk of fluctuations in foreign exchange affecting your profit margins. If this
isn’t possible, explore the option of locking in your profit margin by entering into Forward
Contracts or other foreign exchange management options.
Selling on open account no longer a preferred option?
Export letters of credit are a secure alternative to selling on open account. An export
letter of credit is a payment guarantee in your favour, provided by your buyer’s bank,
which replaces the buyer’s payment obligation. The buyer’s bank guarantees that you
will be paid as long as certain pre-determined conditions have been met (for example,
third party inspection of your goods prior to shipment, or evidence that the goods have
been shipped). Export letters of credit cannot be cancelled without your consent.
“Changing economic times call for new ways of doing business, and this is particularly
true for Canadian companies doing business beyond our country’s borders,” advises
Jana Henderson, director, Global Solutions, RBC Royal Bank. “The most successful
global businesses will be those which take advantage of the specialized capabilities and
advice now available to support them wherever they want to do business.”

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Global Banking advice articles are provided by RBC Global Solutions. For more
information on how RBC can help you take your business around the world with
confidence, call 1-800 ROYAL 20 (1-800-769-2520) or visit www.rbcroyalbank.com/go-
global.




Copyright/Reproduction Notice:
This article is content from Royal Bank of Canada's (Royal Bank) Editorial Edge website and is subject to the website's terms of use.
Royal Bank holds the copyright for the content of Editorial Edge, but agrees to grant the users of the Editorial Edge articles a royalty
free, non assignable, licence to use, reproduce and communicate the articles featured herein, provided that the user is a journalist, it is
used or reproduced accurately and not taken out of context. Any unauthorized use of the content constitutes a violation of Royal Bank
rights. Royal Bank reserves the right at any time to revoke the said licence and require that a user immediately cease to use the said
content upon notification.