State Program Lends a Hand to Small Exporters
When Western Contract International signed a $5.3-million contract to supply custom-made furniture, carpeting and fixtures for a palace in Riyadh, Saudi Arabia, executives at the South San Francisco exporting company were ecstatic.
But they had a problem. Terms of the contract called for the Saudis to make a $1-million advance payment, but Western Contract International had to provide, in return, a guarantee for that amount. The company needed financing but found that banks were reluctant lenders despite Western’s 18 years in business.
The solution was tucked inside a file folder at Western’s headquarters--a small, year-old newspaper clipping announcing the creation of the California Export Finance Program. The state program was established in 1985 to help small and mid-size exporters secure adequate financing to make shipments overseas. That includes working with banks to provide short-term loans and loan guarantees.
Least Favorite Customer
In assisting the exports to Saudi Arabia, the program provided a $350,000 loan guarantee to Western Contract. That enabled the company to borrow $410,000 from the Bank of Credit & Commerce in San Francisco and begin shipping the home furnishings to the Saudi palace.
Exporters traditionally have had a tough time securing loans under conventional banking standards. “When an exporter goes to a bank, he is almost the least favorite customer,” explains L. Fargo Wells, director of the California Export Finance Office, which opened in Los Angeles in July, 1985. Another office was recently set up in San Francisco.
“They are the most highly leveraged creatures. They might do $2 million or more in export contracts with net capitalization of $50,000 or much less,” says Wells.
With that kind of balance sheet, banks often are not willing to lend to exporters. The state established the California Export Finance Program to address such problems and encourage business among exporters who are expected to assume an increasing role in the state’s burgeoning trade, particularly with Pacific Rim countries.
“One of the problems is the lack of understanding by some of banks of the export trade,” explains Roger Cormier, Western’s controller. “Most won’t recognize accounts receivable from foreign clients.” Nor will they consider a letter of credit as collateral because it has no real value until an exporter has actually delivered the goods.
“Lack of capitalization has handicapped every exporter that I’ve known through the years,” says Louis Munoz, vice president and manager at Community Bank of Los Angeles, the first bank to participate in the state program. Munoz had previously worked 20 years in the international division of Security Pacific National Bank.
The program, administered by the California State World Trade Commission, provides short-term loan guarantees of up to $350,000 to small- and medium-size export firms and also assists exporters in structuring and financing contracts.
Wells says the program has made possible a total of $15.5 million in export contracts--$10.8 million through loan guarantees and another $4.7 million through its assistance program.
The contracts range in value from $40,000 to Western’s $5.3-million deal. The goods have included high-tech computer parts, equipment and software from Orange, Irvine and Silicon Valley and aviation equipment and other manufacturing equipment.
Exports to Asia have accounted for $7.5 million of the total business. Two-thirds of that has been exports to China. Exports to Europe, Latin America and the Middle East have accounted for the remaining $8 million.
Hard Sell to Banks
Wells says the program was initially a hard sell to banks, particularly to the big ones. But now, 40 are participating, including Union Bank, First Interstate, Barclays Bank, Dai-Ichi Kango and number of smaller banks such as Community Bank.
The bigger banks, according to Wells, use the export program as a means of providing a “service bridge” for small and medium market customers. “Smaller banks use it to gain more customers, larger banks see it as a means to keep good medium-sized customers.”
To qualify, exporters must be based in California and 50% of their exports must be produced in the state. They also must have a minimum of one year’s experience as exporters--and more if they are manufacturers expanding into the export business.
Wells’ office screens prospective candidates based on their experience and the specific contracts to be financed. The state program seeks to emphasize an exporter’s letter of credit, insured accounts receivable and “soft” collateral such as personal guarantees and foreign receivables. “The idea is to get away from net balance sheet measures,” Wells explains.
“Financial institutions look at your net worth and then decide you’re not big enough,” says Jorge Montero, owner of 8-year-old Montero International of Downey, which was the first exporter to receive a guarantee for a $75,000 loan. That helped Montero fulfill a $200,000 order of computer parts destined for South America. He has since repaid the loan.
“The export program doesn’t look at your net worth first, they first look at you and the transaction you are trying to implement,” says Montero, who also is president of the Export Managers Assn. of California. “They are able to tell you very quickly if it is doable, then decide if it’s a good solid transaction, and the next step is how can we help you.” He believes that a key to the program’s initial success is its people--like Wells--who have extensive hands-on experience as exporters.
The state will guarantee up to 85% of a loan (up to a maximum loan guarantee of $350,000), with banks providing the remaining 15%. That means a qualified exporter can secure a maximum $411,000 loan, with about $350,000 guaranteed by the state. Terms are 180 days for financing accounts receivable and 360 days for pre-export work.
Interest rates vary by lending institutions. “We don’t guarantee to get less than a normal rate but to get money to get the job done,” Wells explains. “Some call what we are doing credit enhancement.”
The office tries to process paper work within 10 days. A qualified exporter can then take the letter of commitment and hunt for a lender. “We pride ourselves on a one-on-one approach, non-bureaucratic and streamlined. We try to run like a business,” says Wells.
Syncro Air Lift, a Santa Ana manufacturer of equipment for aircraft maintenance and construction, used the state export program when it needed about $25,000 to complete a contract to ship equipment to Pusan, South Korea, for Korean Air Lines.
“Community Bank of Los Angeles was looking for new accounts and came and made us an offer,” recalled Ray Born, Syncro vice president. “It’s a wonderful program because when you’re dealing with overseas, you have to put up so much money because of the time lag. We have been selling to Korea for a number of years, using mainly conventional lines of credit. Nothing was specially designed for overseas.
“We haven’t encouraged the overseas sales because of the fact of the financing problem. We probably passed up a lot of opportunities. Now we’ll go looking for opportunities,” Born says.
