Export financing: Key programs for banks

Bank of the Southwest used the SBA’s Export Working Capital Program to finance manufacturing company Precision Technology.

It’s not without risk, but export finance can benefit banks, businesses and communities alike. Here’s when it pays to offer export financing, and tips from those who do.

By Judith Sears

In 2012, Jose Carrera, president and founder of manufacturing company Precision Technology, faced a challenge. Precision’s customers, primarily automotive wire harness manufacturing plants in Mexico, were paying in 90 days, instead of 30. That put a strain on Precision’s capital and hobbled the company’s growth.

Carl Brown, one of three senior vice presidents and Rio Grande division managers for $150 million-asset Bank of the Southwest in Las Cruces, N.M., knew Precision was a viable business. However, financing international receivables was not in the community bank’s wheelhouse. “It’s very difficult for the average community bank to provide financial support for international receivables,” Brown says. “It’s not something we can get into without some help.”

Brown found the help he needed in the SBA’s Export Working Capital Program (EWCP), which provides a 90 percent guaranty on export loans. That guaranty gave Bank of the Southwest the security it needed to provide financing to Precision Technology.

Subsequently, Carrera’s business took off. The company has gone from three to 43 employees, and from about $200,000 in annual sales to a projected $4 million this year. “His whole business has flourished,” Brown observes. “That’s a big impact on a little town like ours.”

Safety net
As the Precision Technology story shows, in the best circumstances, export financing can benefit the bank, its borrower and the community. In many ways, international transactions carry less risk than domestic because they are supported by letters of credit or credit insurance. But the risks involved in international trade dictate that community banks can benefit from programs with government guarantees, either through the SBA or the Export-Import Bank of the United States (EXIM). Because community banks are already familiar with SBA, they will work with SBA programs in their export financing efforts, rather than EXIM.

In addition to the EWCP, SBA offers the Export Express and International Trade Loan (ITL) programs. With loan amounts capped at $500,000, Export Express is the smallest program, guaranteeing 90 percent for loans up to $350,000 and 75 percent for loans up to $500,000.

Both the ITL and the EWCP have limits of $5 million, with a 90 percent guaranty for all loans. With EWCP, financing is tied to a specific transaction, whether receivables or contracts, while the ITL provides term loans, usually for fixed asset financing.

“Export financing is a sticky product. … So, if you can get a customer on board,they won’t move financial institutions too easily.” —Cody Jarrett, First Utah Bank

To further mitigate the risks associated with exporting, some borrowers purchase credit insurance, either through the EXIM or through private firms, such as Atradius or Euler Hermes. For a modest premium, insurers underwrite the transaction. If it fails, they reimburse the exporter for 98 percent of the amount invoiced. “With loan guarantees and insurance on foreign receivables, the accounts receivable on export transactions are actually more secure than many domestic receivables,” says Bryson Patterson, SBA regional export finance manager, Denver.

Finding a niche
With the risk of international trade mitigated, community banks are poised to reap benefits, starting with an ability to differentiate themselves. Cody Jarrett, SBA operations manager of $350 million-asset First Utah Bank in Salt Lake City, recounts the bank’s experience with a hay broker who buys from producers in the intermountain west and sells to markets in China. The broker only found a few financial institutions in Utah that could offer export financing.

“Export financing is a sticky product,” Jarrett says. “There are not as many banks doing it in the market. So, if you can get a customer on board, they won’t move financial institutions too easily.”

The success of the exporter ripples across the community. “It creates stabilized hay prices for the local community, and because the international demand drives the hay prices up, farmers get a better price for their hay,” Jarrett explains.

Banks new to export financing, especially those with limited SBA experience, will undergo a learning curve with the process. “It’s a little more paperwork than conventional credit,” Patterson acknowledges.

However, in addition to the 68 SBA district offices, bankers can take advantage of 21 U.S. Export Assistance Center offices (USEACs) around the United States that are positioned to work with community banks. “Most community banks don’t have someone on staff with an international trade background,” Patterson notes. “We’ll walk them through the SBA process and what to do to protect the transaction.”

The growth of export financing reflects the growing globalization of the economy. “The Utah legislature just approved making Salt Lake City an inland port,” Jarrett observes. “As the state becomes more global, we have to look at a more global perspective. This is another arrow in the quiver we can offer to small businesses.”

Export financing may be unfamiliar, but it can open up new markets to community banks and their clients. “We don’t want people to pass on opportunities,” Patterson stresses. “We want them to take those opportunities and make those sales.

Get started in export financing

Find out who’s exporting, how much and what in your area:

Get help navigating government agencies:

Find trade specialists near you:

EXIM export finance products:

SBA programs:

Judith Sears is a writer in Colorado.