Ex-Im Bank Financing Helps David Compete Against Goliath

Nobody had to tell Perry and Marie Solomon that they had a good thing going in the early years of this decade.

Their Chatsworth business, Smart & Friendly Inc., makes high-tech data storage systems using recordable and rewritable compact discs. It was founded 16 years ago, and until a year ago its revenue grew at an annual rate of about 20%.

Now, because somebody told the Solomons about the U.S. Export-Import Bank, revenue grows at 40%--and Smart & Friendly holds its own in competition with giants such as Hewlett-Packard Co. and Philips Electronics.

As discussed in this space last week, Ex-Im Bank financing gives exporters the same access to working capital loans as companies doing only domestic business. It levels the playing field for small companies like Smart & Friendly in competing against much bigger rivals.

“We don’t compete against any company that doesn’t have more full-time professional jet pilots than we do employees,” Perry Solomon says with a laugh.

“We were probably doing about 20% of our business internationally before we learned about Ex-Im Bank financing, and we were worried about losing market share.

“Without financing, we would have got to the point where domestic sales dominated our business--and we would have lost share in our foreign markets. It was David fighting Goliath, and we wanted David to win.”

It was Ex-Im Bank export financing that enabled them to do so.

Despite its name, the Ex-Im Bank, an agency of the federal government, is not itself a lender. Instead, it guarantees commercial bank loans against receivables and inventory for exporters. Similarly, the Small Business Administration guarantees commercial bank loans for start-up, working and expansion capital to small businesses unable to get ordinary bank financing.

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Domestic businesses finance receivables and inventory all the time, but without help from the Ex-Im Bank, exporters find it next to impossible to do the same. U.S. banks shy away from such loans because of the difficulties inherent in pursuing foreign debtors.

For Perry and Marie Solomon, Ex-Im Bank financing came at a crucial time. Like other high-tech companies such as Dell Computer, Smart & Friendly is a “virtual” manufacturer, employing only 45 people in Chatsworth and partnering with other high-tech companies in designing Smart & Friendly’s hardware and software. Independent suppliers overseas, mainly in Asia, make the components.

Privately held Smart & Friendly also partners with other high-tech companies in designing its products, and these partners wanted global exposure.

As noted, some 20% of Smart & Friendly’s revenue comes from foreign customers, and the Solomons needed some financial muscle to compete against HP and Philips in Europe and other overseas markets.

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Enter Julie Ann Hennessey, an international trade specialist with the Commerce Department, who worked out of offices in downtown Los Angeles, and Tricia Snow, a business development officer at the Ex-Im Bank, who introduced the Solomons to Jill Frieze, an Imperial Bank vice president in Redondo Beach who specializes in Ex-Im Bank loans, and Barry Cohn, an Imperial Bank regional vice president with offices in Sherman Oaks.

Imperial Bank is one of 23 California banks holding what the Ex-Im Bank calls “delegated authority,” which enables it to commit the Ex-Im Bank to guaranteeing loans to exporters such as Smart & Friendly. Banks with such authority can approve Ex-Im Bank loans in as little as a week.

The Solomons gathered tax returns and financial statements and, within a matter of weeks, Frieze and Cohn set up a revolving line of credit enabling the Solomons to finance 80% of their foreign receivables and 75% of their inventory; the credit also allows the Solomons to finance certain purchase orders.

Like other loans guaranteed by the Ex-Im Bank, the Solomons’ draws interest at ordinary bank rates, plus an annual fee of 1.5% of the total line of credit, payable no matter how much of it the Solomons draw down. The Solomons use similar financing for domestic business.

“We don’t believe in long-term debt,” Marie Solomon says. “This is strictly short-term financing. We borrow against foreign accounts receivable and export purchase orders and inventory, and as we receive payment from our customers, we pay down the line.

“If we need to borrow on Tuesday, we can draw down against the line with a simple fax, and on Wednesday we can make a deposit directly to pay that money back.”

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The arrangement, Perry Solomon adds, was crucial to Smart & Friendly’s high-tech partners.

“It has enabled us to give the same level of financing to our international accounts that we give to our domestic accounts,” he says. “Much of the U.S. content of our products is intellectual property, and our partners in developing this property wanted the global exposure.

“It’s clear to us that without the Ex-Im Bank financing, we would have lost critical market share. And by virtue of our importance in the global marketplace, we have also been able to negotiate favorable contracts with our domestic partners--because we can bring them to the global market.”

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.