Borrowing Tailored For Exporters - bank loans - Abstract

Nation's Business, March, 1999 by Roberta Reynes

Roberta Reynes is a business and financial writer in Spencertown, N.Y.

An SBA program enables export firms to get short-term loans and use accounts receivable as collateral.

When Crown Products, Inc., was founded in 1989, the owners financed the business from their own resources for the first couple of years--just as many entrepreneurs do. Then, because of growth in accounts receivable, Crown needed more working capital than the owners could provide.

At that point, Crown--a Metairie, La., company that exports commodities such as sunflower seeds and grocery products--ran into a problem that is largely confined to exporters. It's widely known among exporters that, unlike domestically oriented businesses, companies whose customers are overseas usually don't have the option of using accounts receivable as collateral for financing.

"Commercial lenders don't recognize international receivables as collateral," explains Kee H. Lee, president of Crown. He says the lenders fear that they won't be able to collect on unpaid bills from some foreign countries.

Crown is owned by Lee; his wife, Sun Kim, the director of administration; and Jeffrey Teague, vice president. In its first year, the business did $5 million in sales. Every year since, revenues have grown by 10 to 15 percent. Today the 10-employee company exports its products--which are sold under the company's brand--to 200 customers in 70 countries, generating $16 million in annual sales.

Fortunately for Crown, by the time it had to borrow, the owners had been in business long enough to know that there are government programs that guarantee bank loans to exporters. They found one such program through their local bank.

Finding SBA Assistance

In the fall of 1995, Crown switched banks, becoming a customer of New Orleans-based Hibernia National Bank. Unlike the first lender, Hibernia offered a strong international-banking department and an aggressive focus on serving small businesses. That combination meant good service, a larger line of credit, and low fees, says Lee.

The Hibernia bankers guided Crown to the U.S. Small Business Administration's Export Working Capital Program (EWCP). The program helps lenders provide short-term working capital to small exporters by providing guarantees of 90 percent on transaction-specific loans or revolving lines of credit up to $833,333. Foreign receivables can be counted as collateral. The money can be used for many purposes, including manufacturing costs.

Businesses pay the SBA a guarantee fee of 0.25 percent on an EWCP loan. Although a single loan cannot exceed one year, it can be reissued for two additional one-year terms, with an additional 0.25 percent payment required at each reissuance.

In addition, the bank charges "the prevailing interest rate on a line of credit" or a single-transaction loan, says Carol Ward, a Hibernia vice president and the bank's government/SBA manager.

Crown started out with a $550,000 EWCP-guaranteed line of credit at Hibernia. After a year, the line was extended to $760,000.

"We used the [money backed by the EWCP] to offer terms to customers and to finance receivables-in other words, to buy the products from our suppliers," says Lee. In September 1997, the business graduated to a program offered by the Export-Import Bank of the United States, which offers bigger loan guarantees than the EWCP

A New Coordination

The SBA's trade-financing program has been around for about 10 years. But it is just starting to hit its stride.

Eileen E. Cassidy, director of the SBA's Office of International Trade in Washington, D.C., says the EWCP was "re-engineered" in 1994. It was coordinated with programs offered by the Ex-Im Bank to eliminate duplication, make processing easier for lenders, and enable businesses to move smoothly from the EWCP to the Ex-Im Bank as they grow.

"We have quadrupled the number of loans that we've done since the program was re-engineered," says Cassidy. "We are up to 413 guarantees in fiscal 1998."

About 100 more loan guarantees were made through a complementary offering called the International Trade Loan (ITL) program. It provides guarantees on loans of medium to long term-up to 25 years. The SBA can guarantee up to $1.25 million when the two programs are used together.

Cassidy says the ITL is "for needs like purchasing equipment or building another facility It is used mostly in combination with other SBA-guaranteed loans."

Even though the number of loans made through the programs has grown since the re-engineering, there have still been relatively few takers. "A lot of small businesses and lenders don't know they exist," Cassidy acknowledges. That may be about to change. "We are trying to create a demand for small businesses who want to explore exporting," Cassidy says. For the first time, goals are being set for the number of loan guarantees made through the two programs, and progress will be monitored closely.

Lenders' Criteria

The SBA's World Wide Web site lists the various eligibility requirements for the EWCP and the ITL. (See "Getting Started In Exporting," below.) For example, it says that retail and service businesses must have revenues of at least $3.5 million. But Cassidy observes that "if we believe that there is a real need, I don't think that we are as strict with those industry classifications" as business owners might expect.