Lender Life

Fresh opportunities in export financing

By Judith Sears

Jimmy Stilley, vice president, commercial lending for OakStar Bank in Springfield, Mo., had never given much thought to international export financing. However, when a director of the $240 million-asset community bank referred a loan request from a manufacturer of high-tech industrial chicken coops looking to export to South America, Stilley did some research.

The Small Business Administration was his first stop. Stilley discovered that the SBA Export Express program, available to any bank with the SBA’s standard domestic certified lender status, met both the exporter’s and OakStar Bank’s needs. The program, with a $500,000 maximum loan amount, guarantees 90 percent of the first $350,000 of an export loan and 75 percent of the remainder. That mitigated OakStar Bank’s lending risk to exporters, such as the industrial chicken coop manufacturer.

Further, the SBA’s Export Express program works with a community bank’s lending documents, so the export loan program’s “mechanics” were familiar to the progress of underwriting standard commercial loans, Stilley found. “Once you understand how to mitigate the risks of a buyer who’s 10,000 miles away, you’re back to a normal transaction,” he observes.

Demystifying the mystery

OakStar Bank’s experience highlights a couple of facts about export financing: More small businesses are entering international markets, and it’s easier to finance those efforts than many community banks may have realized.

“I’m amazed when travelling that I meet more and more CEOs of small and medium-sized businesses that are exploring international markets for the first time,” says Peter Hughes, managing partner for CLB Advisory LLC, an export financing consulting firm in Dix Hills, N.Y.

Further, Hughes adds that many small businesses would prefer not to deal with the bureaucracy of the largest banks. That leaves an opening for community banks—for those that get in the export financing game.

Moreover, there are numerous benefits for community banks willing to learn some new skills, starting notably with financial benefits. Loans with 90 percent government guarantees can enhance a bank’s credit standing, for example. “Your risk-weighted assets go down instead of up when you make one of these [government-guaranteed export] loans,” Hughes points out.

At the same time, the opportunities for fee-related income from export financing can be significant. For instance, since 2009, the SBA, as part of an effort to encourage export financing, has allowed banks to capture loan fees that the government previously had retained. “It becomes very lucrative from a fee standpoint,” Stilley says.

Another benefit of export financing is simply the opportunity to help grow local businesses, and expand banking relationships with those growing businesses. Providing the financing that allows a business to offer payment terms and be more competitive internationally, for example, directly contributes to creating more income and jobs.

Level One Bank in Farmington Hills, Mich., is another new entrant into export financing. “We saw an SBA presentation and thought it was a great way to broaden our relationship with our clients,” says Kyle Anne Sasena, vice president, international product specialist for the $500 million-asset community bank.

The SBA programs turned out to be a good fit and word traveled fast about Level One Bank’s new capabilities. Just recently, the bank was named SBA’s Export Finance Lender of the Year, beating out megabanks with long records in international finance.

Considering the special risks

While the lending opportunities in export financing are real, as with any lending, there are also risks. Those risks boil down to whether the exporter will repay the loan, which hinges on whether the exporter’s foreign customer in turn pays the exporter.

Experts caution community banks to be sure their export business customers can both fulfill and service large international orders. Failure in either of these activities could cause a foreign buyer to bow out of an export arrangement. “You need to know if the company can deliver,” Sasena advises.

On the other hand, collecting on foreign receivables can be more difficult. The answer to that challenge, experts agree, is helping the exporting business obtain receivables insurance. “It’s the core to getting any bank comfortable with foreign receivables,” explains Gary Mendell, president of Meridian Finance Group, a company in Santa Monica, Calif., that specializes in trade credit and finance.

Letters of credit services are frequently required in export transactions, but for community banks without a letters-of-credit department that could be challenge. For those banks, Hughes recommends holding off on offering that service or seeking out a partner to either provide the letters of credit service or letters of credit insurance for the bank and the exporter.

As the experiences of OakStar Bank and Level One Bank show, getting into export financing isn’t insurmountable. Neither the U.S. Export-Import Bank nor the SBA require special export finance certification. However, the Ex-Im Bank tends to serve larger businesses and loans, causing more community bankers to gravitate using the SBA’s export financing programs.

The SBA’s Export Express loan program is probably the simplest initiation into export finance. The $500,000 maximum loan amount will meet many small-business export needs, and the ability to use a bank’s regular underwriting documents typically eases its transition into export financing. For larger financing credits, the SBA’s Export Working Capital Program will finance a maximum of $5 million with a 90 percent loan guarantee.

While there are new steps and risks to navigate in export financing, Hughes urges more community banks to explore its opportunities. Otherwise, he believes, the growing small-business export market will look elsewhere for financial support. “Does the community bank work with them, or let that business go to another bank and risk losing the entire relationship?” he asks.

Good question!

Judith Sears is a writer in Denver.