Exporting to the United States – A Team Canada Inc Publication

5.7 Reducing financial risk through buyer credit checks

There are major opportunities for Canadian exporters in the United States, and the similarities between the two countries – both having sophisticated business mechanisms, both technologically advanced – can suggest that doing business in the U.S. is largely free of risks.

This is not the case; the risks can be huge, largely because of the frequency of buyer defaults and the level of business bankruptcies south of the border. In 2000, 98 public companies in the United States sought bankruptcy protection. In 2001, this number jumped to 151, and in 2002, to 191. Billions of dollars, much of it owed by these corporations directly to other businesses, vanished almost overnight. This caused a ripple effect throughout international supply and distribution chains.

An American bankruptcy, or merely a buyer's failure to pay, may spell serious financial trouble for a Canadian exporter that is badly exposed to its buyer's risk. However, you can do a lot to protect yourself from the risk of non-payment by carrying out a careful credit check before signing the contract. Some of the questions you need to ask are:

• Is the buyer creditworthy? Is he or she willing and able to pay me?
• How long has the company been in business?
• Is its financial record clear of irregularities?
• What reputation does its management have?
• Do other suppliers give it a good credit report?

There are several things you can do to obtain this information. Among them:

• Export Development Canada's database contains detailed credit information on millions of U.S. buyers. Its Export Check service (available for $C45.00) will provide you with a credit profile of the company, any payment or claims experience EDC has had with the company, and EDC's opinion as to whether the buyer is insurable. The service also provides Dun & Bradstreet reports on the company, which include credit and financial information, details of the company history and its management team, and any legal problems the company has.
• Contact your Canadian bank and ask if it has a correspondent bank that can report on the buyer's reputation.
• Find out if the buyer deals with other Canadian companies and check with them to see what they think of the buyer. Mention the buyer to Canadian companies you've dealt with in the past, in case they may have pertinent information.
• There are many consulting firms and credit reporting agencies in Canada and the United States that will help you check out a buyer. Such checking can be expensive, but if it uncovers serious risks for your company, it's worth every penny.