Trade finance workshops: financing the needs of U.S. small- and medium-sized enterprises

Business America, Oct, 1997 by John R. Shuman

Over the past two years, the Department of Commerce hosted workshops around the U.S. for export financial service providers to identify obstacles to increasing trade finance to small- and medium-sized enterprises (SMEs) and to elicit recommendations from the private sector participants as to what was needed to remove them. Over the next year, a new program has been set up to educate the exporting community about the value of innovative finance as a sales tool. This article will summarize the results of the first series and outline the new one in the boxed text.

The first series of workshops, aimed at the financial community, were well attended by senior trade finance officials from money-center, regional and community banking institutions, trade finance intermediaries, export credit insurance brokers, export factors, officials from state export finance authorities, non-profit trade intermediaries, consultants, and academics. They discussed and debated a whole array of initiatives floated by the private sector to stimulate financing of exports by SMEs. Though consensus was not reached as to the nature of the problems, much less the solutions, participants offered many recommendations, the most significant of which are discussed below. The workshop was a watershed in that it raised the awareness level of the private sector as to the importance the federal government attaches to finding ways to increase trade finance availability for SMEs. The recommendations shown in bold throughout this paper were made by the private sector participants.

We had three objectives for these workshops. First, we needed to validate the themes we had heard time and time again -- that there is a gap between supply and demand for trade finance capital; and that there is a huge untapped export potential of SMEs which is impeded by a lack of finance. Second, we needed to identify specific ways the U.S. government could facilitate an increase in trade finance capacity for U.S. exporters generally. Finally, we needed to discuss the merits of the recommendations contained in this paper.

Overview

Exports have become increasingly important to the U.S. economy, and the availability of adequate trade finance on reasonable terms is critical to the international competitiveness of U.S. business as well as to export success. In recent years, there has been a growing concern about such financing, as businesses across a wide range of sectors have reported difficulties and even loss of export sales due to inability to obtain the necessary financing. Given the crucial role small business plays in the U.S. economy, and recognition that, when it comes to exporting, small businesses are not realizing their potential, the Commerce Department recognized that it was vital for the health of the U.S. economy that the workshops, at the least, result in a movement by the private sector to expand the availability of trade finance provided to small- and medium-sized enterprises.

Economic Role of Small Business

SMEs are very important to the U.S. economy. Today, more than 99 percent of all businesses in the United States are small firms. They employ more than half of the U.S. workforce and account for half of our gross domestic product. Small businesses are the engine that is driving the next generation of U.S. jobs, producing an estimated 66 percent of all net new jobs. SMEs are also one of the most dynamic sources of U.S. export growth. Based upon our most recent statistics, although approximately 96 percent of U.S. exporting companies are SMEs, they only account for about one-third of U.S. exports. We think they are not exporting as much as they could.

Impediments to Small Business Exports

In almost every list of reasons why small firms have not yet met their export potential, access to trade finance is invariably cited as a major barrier. This dearth of export financing is particularly damaging to SMEs as such firms do not have, as do larger firms, the internal financial strength to generate working capital to produce, process or acquire goods and services to fill purchase orders, or ship and extend credit to their buyers. Also, SMEs lack the ability to tap the capital markets. Accordingly, SMEs rely to a greater extent for financing on commercial banks than do their larger competitors.

As early as 1991, trade finance was identified as a priority area by the Trade Promotion Coordinating Committee (TPCC). The TPCC is comprised of 20 government agencies, chaired by the Secretary of Commerce. As a result of meetings held with local bankers in 30 cities across the U.S. to discuss the then current extent of private export finance availability, disincentives to expansion of such private Trade finance, and strengths and weaknesses of existing U.S. government trade finance programs, the TPCC concluded that trade finance availability fell well short of demand, particularly with respect to the type of finance for which the need was greatest: pre-export financing for sellers. In addition, the mere perception of bank disinterest in trade finance had a further inhibiting effect: would-be exporters were not asking for such financing, or gave up at the first sign of discouragement from loan officers.