Analysis of the current trade difficulties for U.S. exporters and the hazards of late payments from exports.
Small-company exports could put a big dent in the U.S. trade deficit. Why, then, do we make it so hard to get started?
Want to know one secret to reducing the trade deficit? Take a good look at Patrick M. Williams Sr.
Williams is chairman of Stanley Industrial Corp., a Jacksonville, Fla., manufacturer of ventilating equipment that reports sales of $5 million. His company exports -- but very rarely, and it does not actively pursue overseas business.
That's the way Williams likes it. Before coming to Stanley, he worked for a company that sold heavily abroad. There, Williams saw what life as an active U.S. exporter was like -- and vowed never to repeat it. He saw his employer competing against foreign companies that could offer better payment terms, often because their governments helped guarantee credit risk. "American companies were out there fighting almost with both hands tied behind their backs," he says.
The experience taught Williams something important about exporting: "It's not worth the hassles." But, he adds, if government policies changed, "we might be interested."
That's a big if. Still, it could be the if that means the difference between solving or not solving our $100-billion trade deficit. And that means the difference between building a healthy, strong economy -- or dismantling the one we've got by selling assets to foreigners to pay our import bills. To balance our trade today, we'd have to increase our exports by at least 25%. To do that, we need the help of the many Patrick Williamses who now export infrequently.
And many they are. When the Census Bureau did a comprehensive survey of U.S. exporting data, the results were astonishing. According to one analysis of the bureau's data, 29% of the nation's 100,100 exporters made only two international shipments in 1987, worth an average annual total of $50,000. All in all, 86,600 infrequent exporters accounted for only 9% of reported international sales, while 3,600 frequent exporters did 78%. (The remaining 9,900 were considered growing exporters.)
Those numbers suggest two things. First, it is critical that we encourage our frequent exporters, because we depend on them so much. But the percentages also hint that something is not right. Why are there so few frequent exporters? What prevents the vast majority from exporting more? After all, it is unreasonable to expect just 3,600 companies that already export heavily to eliminate a $100-billion trade deficit.
In truth, there are numerous barriers facing a company that starts exporting, particularly if it's small. While we do a fine job of producing government brochures and inspiring magazine articles about going international, we're not so hot at the less glamorous work of building a solid trade infrastructure, one that supports and encourages the small exporters we need. It's as if we'd asked our astronauts to reach the moon but wouldn't invest in a space program.* * *
One of the biggest barriers is financing. And the trouble with export financing for U.S. companies that have a small amount of international sales is pretty easy to understand. "There isn't any," says Leslie Stroh, editor and publisher of The Exporter magazine. "It isn't available."
Stroh is exaggerating -- slightly. Few would dispute the significant shortage of export financing in this country, especially for small companies. A recent report by the Exports Subcommittee of the House Small Business Committee states the problem well:* * *
The U.S. has failed miserably in providing these [small] businesses the necessary means to export successfully. Specifically, the U.S. has failed to provide small business with the financial resources that are required in order to compete. U.S. companies are in desperate need of financing either to cover expenses leading to an export sale (usually in the form of a working capital loan to cover expenses related to labor, material, and other production and shipping costs) or to provide the foreign buyer with more flexible terms of payment. Working capital loans are especially needed by small and medium-sized businesses that are interested in exporting.* * *
That financing gap means lost foreign sales for U.S. companies. In a 1988 House banking subcommittee survey of exporters (including large ones, which generally have better access to capital), 53% said they had lost export business because they couldn't get financing. Two-thirds reported that competitive financing was only sometimes or rarely available.
The problem is getting worse. Exporters are particularly vulnerable to the current credit crunch because their lines of credit are perceived as especially risky. Ironically, this crunch is occurring at a time when, because the dollar is low, export opportunities have seldom been more plentiful -- or more important to our economy. The National Association of Manufacturers estimates that in the first half of 1990 exports accounted for 80% of U.S. economic growth.
With no outside capital, small companies must finance their exports themselves. That does more than just slow growth; it often jeopardizes a business's financial health. (See "Getting Paid," page 3.) Because of the special strains that exporting puts on a company's cash flow, our infrequent exporters may be exporting so little because that's all they can afford to finance internally. And they have no other funding options.
Even small companies with solid banking relationships may not be able to get their banks to finance international business. For instance, few banks will allow small exporters to borrow against their foreign receivables. "There's something really wrong when you can't take IBM Europe receivables to your bank, but you can take those from Bank of New England," says Stroh.
The reason for the financing gap is twofold. One, U.S. business concentrated on the domestic market for so long that our banks never developed the widespread export-financing expertise of their foreign counterparts; there was no demand for it. Two, events of the past decade have decimated the capacity we did have. During the 1980s many of the banks that once provided international financing got out of the business or cut their staffs substantially.
The withdrawal from export finance reflects the wider problems of the U.S. banking industry. After the deregulation of financial services, large corporations began needing banks for certain transactions only. Bankers could no longer count on making money on long-term, one-stop-shopping relationships. In the old days, providing export financing was an important support service to keep customers happy; in the new era, it was too labor-intensive and didn't generate high enough returns.
Then came the Third World debt crisis. That led many banks to shy away from everything international even though their losses were from loans to Latin American governments, not U.S. exporters. It didn't help that legislation passed after the debt crisis increased banks' required documentation of international transactions.
The problem is compounded by the fragmentation of the U.S. banking industry. What little international-trade expertise there is, is concentrated in big banks -- not the local banks that most small companies use. Because many banks have now pulled away from export financing, those left are free to focus on the most profitable deals, which are generally the largest. As a result, in some regions the minimum transaction size that banks will consider is $1 million. Meanwhile, Census Bureau statistics show that 85% of all exporters have average shipments of less than $25,000. What we have today is an export-finance structure way out of touch with the times, one that completely fails the small exporters that are increasingly important to our economic health.
In fairness to U.S. bankers, they may be in a no-win situation. Because there are so few frequent exporters, banks have a hard time generating economies of scale in export finance. The many infrequent exporters require too much hand-holding to be profitable.* * *
One solution would be government programs either to educate infrequent exporters or to reduce bankers' risks in international loans. After all, governments all over the world get involved in promoting their exports.
Such programs already exist in this country, but they too suffer from our national apathy about exporting. Consider the Export-Import Bank (Eximbank), the U.S. export-finance agency. It provides loans, guarantees, and accounts-receivable insurance to U.S. exporters. There are comparable agencies in 82 other nations. However, Eximbank is among the least aggressive, according to Delio Gianturco, whose firm, First Washington Associates Ltd., advises governments about export credit. Gianturco's research shows that in most industrialized countries the national export-finance agency provides funding to about 13% to 15% of all export transactions, and in most developing nations the percentage is about 5% to 7%. In contrast, he says, Eximbank helps finance less than 2% of all U.S. export transactions. Eximbank used to do more, according to Gianturco. However, the agency was a victim of 1980s budget cuts.
The problems run deeper than budget cuts, though. While many other nations subsidize their export financing, Eximbank's lending is expected to be self-sufficient. As a result, the agency is scrupulous about dotting its i's and crossing its t's, especially since it, like the banks, wrote off a lot of bad loans in the '80s. Both of the Eximbank programs aimed at small companies -- the Foreign Credit Insurance Association program, which insures foreign receivables, and the working-capital-guarantee program -- can be difficult to work with.
Ask David Lamb. His family's midsize company, Lamb-Gray's Harbor Co., manufactures equipment for paper mills. Based in Hoquiam, Wash., Lamb-Gray's Harbor exports extensively -- and as the dollar has declined, the company's sales have soared from $27 million in 1987 to a 1990 record high of $120 million. In the process, Lamb often found himself moving projects that required outside financing to the company's Canadian plant. That's because it was so much easier to work with Canada's Export Development Corp. than with Eximbank. "At Exim we suffered the bureaucratic runaround," Lamb says. "We've generally found in Canada a much more responsive environment for putting these things together. They look upon it as something of national strategic importance."
Still, Lamb recently had his first successful experience with Eximbank. With the aid of the Export Assistance Center of the state of Washington, his company got its first working-capital guarantee. That reflects one of the rare bright spots in U.S. export finance: the increasing effectiveness of a few state programs.
Probably the most impressive is California's. Since its inception with a $2-million fund, in 1985, the California Export Finance Office has issued 271 working-capital guarantees, leading to export sales of $290 million. It is similar in structure to Eximbank's working-capital-guarantee program but can work more closely with local banks and can provide technical assistance to inexperienced exporters.
Unfortunately, when it comes to export finance, only a handful of states can compare in any way with California. It committed a substantial amount of money to export financing, an example few states are likely to follow now that so many state budgets are in the red. There are, however, 11 states that play the role Washington State officials did for Lamb-Gray's Harbor. Those states take part in a marketing program launched by Eximbank in late 1987 to train state and city personnel as Eximbank loan packagers. The local officials help small companies deal with the applications paperwork and steer them through the organization. They often refer companies to private-sector money and provide technical export information.
Such programs do help exporters, but they have their limits. The biggest is that with no money of their own, the state officials must work within the constraints of Eximbank and Small Business Administration programs. (The SBA has an export revolving line of credit, but it is seldom used and is being revamped.) "We really have no other options," laments one state official.
Although it's a shame that we need state bureaucracies to interpret federal ones, the states' involvement is a definite plus for small companies. Another encouraging change is under way at the United States & Foreign Commercial Service. US&FCS is the branch of the Department of Commerce assigned to help U.S. companies with international marketing. Because more and more exporters have been coming to US&FCS's district offices with financing problems, the agency plans to train its staff in the subject and put together regional databases of financing sources.
Interesting alternative-financing mechanisms are evolving in the private sector as well. (See "Resources," page 4.) One example is Trading Alliance Corp. (TAC), a New York City trade-finance merchant bank founded in 1988 by refugees from Manufacturers Hanover's now-defunct export trading company. For a hefty fee of 5% to 7.5% of the financing provided, TAC will make short-term loans to traders who have solid letters of credit and good track records but lack the assets to satisfy banks. "We are lending to the transaction rather than to the company," explains TAC's Tony Brown.* * *
All of those innovations, from state export-finance authorities to trade-finance boutiques like TAC, should help -- a little. Realistically, these types of changes are all that is in the offing: small and incremental tinkering at the edges of the problem.
Yet our appetite for imports means we must turn back into a nation of traders. At the same time, we are making a transition from a nation whose vast, uniform markets lent themselves to mass production, to more segmented markets where smaller, more agile companies do better. These twin pressures -- the need to finance both more exports and smaller exporters -- have put our export-financing system under enormous strain.
Whether we like to admit it or not, our government does set the rules of the free market, particularly in heavily regulated areas like banking and exporting. When lending to inexperienced exporters isn't profitable, we can't expect banks to do it without government assistance. When those government assistance programs involve a frustrating amount of red tape, we directly reduce exporting's appeal to small companies and banks. When we spend much less than most other industrialized nations on export support, we are handicapping our companies in the world marketplace. None of those problems are insoluble, but they do require policymakers' serious attention. Right now, they don't get it.
The Hazards of Export Sales
So, what's so bad about using your own cash to finance export sales? After The Exporter magazine analyzed the effects of internally financed exports on cash flow, publisher Leslie Stroh concluded that "the single most critical danger to a small business was expanding export sales too rapidly."
The reason is simple: export receivables generally take longer to collect. And, to be internationally competitive, the terms must often be quite generous. According to Robert J. Kaiser of the Export-Import Bank, 115 days is a typical term for foreign accounts receivable. Thus, by self-financing exports, a small company stretches its receivables while keeping its payables the same -- a recipe for disaster if cash is tight. "It sucks you dry on working capital," explains Kenneth L. Keach, president of the Export Assistance Center of the state of Washington. "If you get the slightest delay on a big export order, you can't meet your payroll and your taxes, and you're dead."
Given the sorry state of export financing, what's a poor exporter to do? Here are some possibilities
* Find someone in your bank's international department -- or find a bank that has one. Your loan officer may not volunteer an introduction; according to Kenneth L. Keach of Washington State's Export Assistance Center, loan officers in some banks fear losing customers to the international department.
* Study all your options. One excellent book on the subject is Exporting: From Start to Finance, by L. Fargo Wells and Karin B. Dulat (Tab Books, 1989, $39.95).
* Try the U.S. branches of foreign banks. They are often more comfortable with exporting. Besides, that foreign buyer whose unknown name scares your hometown bank could be somebody they've been working with for a hundred years.
* Get FCIA insurance. You have a much better chance of getting a bank to lend against insured export receivables. The Foreign Credit Insurance Association is backed by Eximbank and administered by private insurance companies. It is the Eximbank program small companies use most. For information contact FCIA at its headquarters, in New York City, or at its offices in Miami, Chicago, Houston, and El Segundo, Calif.
* Sell your product to an export trading company. It will take on the hassles -- and you will get lower margins. One problem: U.S. export trading companies have a difficult time getting financing, so there aren't as many here as abroad.
* Check out your state's programs -- or Eximbank's. You're in luck if your state has an active financing program or prepares applications for Eximbank. If not, there are at least two private-sector firms -- Delphos International in Washington, D.C., and Inter Trade Services Inc., in Houston -- that help companies navigate Eximbank programs for a fee. For more information about Eximbank programs call the agency at (800) 424-5201 (in D.C. call 566-8860). Be prepared: in part because Eximbank requirements are unattractive to banks, only about 60% of the guarantees Eximbank is willing to make get funded. Even though Eximbank takes on 90% of the risk, many borrowers can't find a lender to take the other 10%.
* Look into alternative financing sources. One starting point: In its January/ February 1990 issue, Export Today magazine, based in Washington, D.C., published a directory of companies involved in innovative export-financing techniques.
* Use another nation's program. If you have operations abroad or foreign joint-venture partners, check out the financing available to them, since it's often more aggressive. One extreme example: Bill Delphos of Delphos International says he is working with clients to try Japan's new import-promotion programs. They are designed to reduce political tension by, among other things, helping finance U.S. exports to Japan.