THE EXPORT WORKING CAPITAL PROGRAM
Y 4.Sf1 1:104-49
Tlie Export Uorking Capital Progran, ...
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT PROGRAMS
AND THE
SUBCOMMITTEE ON PROCUREMENT, EXPORTS, AND
BUSINESS OPPORTUNITIES,
OF THE
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
WASHINGTON, DC, SEPTEMBER 7, 1995
Printed for the use of the Committee on Small Business
Serial No. 104-49
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U.S. GOVERNMENT PRINTING OFFICE
93-907 CC WASHINGTON : 1996
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-052456-3
THE EXPORT WORKING CAPITAL PROGRAM
Y 4,SI1 1:104-49
The Export Uorking Capital Progran, ...
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT PROGRAMS
AND THE
SUBCOMMITTEE ON PROCUREMENT, EXPORTS, AND
BUSINESS OPPORTUNITIES,
OF THE
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
WASHINGTON, DC, SEPTEMBER 7, 1995
Printed for the use of the Committee on Small Business
Serial No. 104-49
KhV /
■~iii
'^^? p-^.
'-w^
U.S. GOVERNMENT PRINTING OFFICE
93-907 CC WASHINGTON : 1996
For sale by the U.S. Government FYinting Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-052456-3
COMMITTEE ON SMALL BUSINESS
JAN MEYERS, Kansas, Chair
JOEL HEFLEY, Colorado JOHN J. LaFALCE, New York
WILLIAM H. ZELIFF, Jr., New Hampshire IKE SKELTON, Missouri
JAMES M. TALENT, Missouri RON WYDEN, Oregon
DONALD A. MANZULLO, Illinois NORMAN SISISKY, Vii^nia
PETER G. TORKILDSEN, Massachusetts KWEISI MFUME, Maryland
ROSCOE G. BARTLETT, Maryland FLOYD H. FLAKE, New York
LINDA SMITH, Washington GLENN POSHARD, Illinois
FRANK A. LoBIONDO, New Jersey EVA M. CLAYTON, North Carolina
ZACH WAMP, Tennessee MARTIN T. MEEHAN, Massachusetts
SUE W. KELLY, New York NYDIA M. VELAZQUEZ, New York
DICK CHRYSLER, Michigan CLEO FIELDS, Louisiana
JAMES B. LONGLEY, Jr., Maine WALTER R. TUCKER III, California
WALTER B. JONES, JR., North Carolina EARL F. HILLIARD, Alabama
MATT SALMON, Arizona DOUGLAS "PETE" PETERSON, Florida
VAN HILLEARY, Tennessee BENNIE G. THOMPSON, Mississippi
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
SAM BROWNBACK, Kansas KEN BENTSEN, Texas
STEVEN J. CHABOT, Ohio WILLIAM P. LUTHER, Minnesota
SUE MYRICK, North Carolina PATRICK J. KENNEDY, Rhode Island
DAVID FUNDERBURK, North Carolina JOHN ELIAS BALDACCI, Maine
JACK METCALF, Washington
STEVEN C. LaTOURETTE, Ohio
Jenifer Loon, Staff Director
Jeanne M. ROSLANOWICK, Minority Staff Director
Subcommittee on GtovERNMENT Programs
PETER G. TORKILDSEN, Masschusette, Chairman
JOEL HEFLEY, Colorado GLENN POSHARD, Illinois
SUE MYRICK, North Carolina RON WYDEN, Oregon
SUE W. KELLY, New York KWEISI MFUME, Maryland
DICK CHRYSLER, Michigan CLEO FIELDS, Louisiana
DAVID FUNDERBURK, North Carolina BENNIE G. THOMPSON, Mississippi
STEVEN C. LaTOURETTE, Ohio
Laurie Rains, Subcommittee Staff Director
SUBCOMMnTEE ON PROCUREMENT, EXPORTS, AND BUSINESS OPPORTUNITIES
DONALD A. MANZULLO, Illinois, Chairman
DICK CHRYSLER, Michigan EVA M. CLAYTON, North Carolina
MATT SALMON, Arizona NORMAN SISISKY. Vii^nia
SAM BROWNBACK, Kansas FLOYD H. FLAKE, New York
STEVEN J. CHABOT, Ohio EARL F. HILLIARD, Alabama
DAVID FUNDERBURK, North Carolina CHAKA FATTAH, Pennsylvania
ROSCOE G. BARTLETT, Maryland WILLIAM P. LUTHER, Minnesota
LINDA SMITH, Washington
Philip D. EskelanD, Subcommittee Staff Director
(II)
CONTENTS
Page
Hearing held on September 7, 1995 1
WITNESSES
Thursday, September 7, 1995
Cummins, William C, group vice president of South Trust Bank of Alabama .. 8
Hecker, JayEtta, Director, International Trade, Finance and Competitiveness,
General Accounting Office 3
Kamarck, Martin A., vice chairman, Export-Import Bank of the United
States 5
Philley, Cassandra, Deputy Administrator, Small Business Administration 4
APPENDIX
Opening statements:
Clayton, Hon. Eva M 21
Flake, Hon. Floyd H 22
LaFalce, Hon. John J 24
Manzullo, Hon. Donald A 25
Torkildsen, Hon. Peter G 27
Prepared statements:
Cummins, William C 29
Hecker, JayEtta 33
Kamarck, Martin A 53
Fhilley, Cassandra 63
Additional material:
SBA Information Summary 75
Triple I Corporation 77
The National Association of Women Business Owners 80
Miscellaneous letters 89
(III)
THE EXPORT WORKING CAPITAL PROGRAM
thursday, september 7, 1995
House of Representatives, Subcommittee on Gov-
ernment Programs Joint with the Subcommittee
ON Procurement, Exports, and Business Opportu-
nities, OF THE Committee on Small Business
Washington, DC.
The subcommittees met, pursuant to notice, at 10 a.m., in room
2359-A, Raybum House Office Building, Hon. Peter G. Torkildsen
(Chairman of the Subcommittee on Government Programs) and the
Hon. Donald A. Manzullo, (Chairman of the Subcommittee on Pro-
curement, Exports, and Business Opportunities) presiding.
Chairman TORKILDSEN. The subcommittee will come to order. On
August 4, the Small Business Committee markedup H.R. 2150, the
Small Business Credit Efficiency Act of 1995, with the intent of de-
creasing the subsidy rate for the Small Business Administration's
(SBA) 7(a) loan program. The legislation lowers the guarantee rate
to 80 percent for all loans below $100,000 and 75 percent for all
loans above $100,000.
During the markup, the full committee ranking minority mem-
ber, Mr. LaFalce, who's a witness here for this hearing, offered, but
graciously withdrew, an amendment allowing the SBA to provide
a 90 percent guarantee for revolving line of credit for export pur-
poses to the maximum of 3 years for repayment, regardless of the
loan amount.
This is a joint hearing of the Small Business Subcommittee on
Government Programs and the Subcommittee on Procurement, Ex-
ports and Business Opportunities. The purpose of today's hearing
is to examine the SBA's partnership with the Export-Import, or
Eximbank, through the Export Working Capital Program.
It is this panel's intention to explore the implications of Mr. La-
Falce's proposed amendment, especially as compared with loan
guarantee rates provided by the Eximbank, and to review the
progress of the harmonization of export financing programs be-
tween the two agencies.
The Export Working Capital Program is a product of the 1993
Trade Promotion Coordinating Committee recommendations re-
garding export financing. On October 1, 1994, the Eximbank and
the SBA harmonized their respective pre-export working capital
programs. An agreement was made which allows the SBA to proc-
ess loans under the amount of $750,000 and the Eximbank to proc-
ess loans above that amount.
There are a number of arguments, both for and against, retain-
ing the 90 percent guarantee rate for export purposes. It is my
(1)
hope that through testimony from and discussion with our distin-
guished witnesses that we will address these issues and make a
solid recommendation to the full committee as to how to proceed.
With that, I will yield to my friend and colleague, Chairman
Manzullo for any opening statement he may wish to make.
[Chairman Torkildsen's statement may be found in the appen-
dix.]
Chairman MANZULLO. Thank you, Mr. Chairman. Rather than
read my opening statement, which parrots some of the things that
you've said, let me, first of all, thank the witnesses in advance for
coming here to testify. I would yield to Mr. LaFalce.
[Chairman Manzullo's statement may be found in the appendix.]
Mr. LaFalce. I thank, both. Chairman Torkildsen and Chairman
Manzullo, very, very much for having this joint hearing. I think
you both have stated the issues rather succinctly and there's no
reason to restate it. It seems to me that we ought to have an har-
monization of the programs.
It also seems to me that the Export Working Capital Program is
a vital program if we're going to enhance our exports, especially
our small business exports.
It seems clear to me, too, that the SBA is moving vigorously in
that direction, enhancing exports, hopefully, by utilizing the Work-
ing Capital Program.
In less than 1 year, in fiscal 1995, the SBA has approved 132 ex-
port working capital transactions worth $44.3 million. That's near-
ly double all the transactions for fiscal year 1994, that totaled 77
transactions for $27.4 million. We'll let the witnesses speak for
themselves.
When I withdrew the amendment during the committee mark-
up, it was with two thoughts in mind. As Chairman Meyers stated,
I would have ample opportunity to offer the amendment on the
floor and also that she hoped that consensus would emerge at the
hearing that we had after withdrawal of my amendment.
I may be hindered in the first objective, because I can under-
stand Mrs. Meyers is considering bringing the bill up on the sus-
pension calendar. Therefore, it would take unanimous consent to
offer that amendment to it. That's not impossible.
It's been difficult. With respect to development of consensus, it
depends on what you mean by consensus, of course, but in that I'm
dependent upon the good will of the committee on both sides, if
consensus is developed, based upon, hopefully, an open mind to the
testimony of the witnesses.
With tnat, I will enjoy hearing today's panel to see if the wit-
nesses have any consensus.
[Mr. LaFalce s statement may be found in the appendix.]
Chairman Torkildsen. Thank you, Mr. LaFalce.
Now, I will turn to our panel of witnesses, introduce all of them
first and then ask for their testimony. First, Ms. JayEtta Hecker,
is the Director of the International Trade, Finance, and Competi-
tiveness Office at the General Accounting Office; Cassandra Pulley
is the Deputy Administrator of the U.S. Small Business Adminis-
tration; Martin A. Kamarck is the vice chairman and chief operat-
ing officer of the Eximbank at the United States; and William C.
Cummins is the group vice president of South Trust Bank of Ala-
bama and is the Cochairman of the Small Business Export Finance
Committee of the Banker's Association for Foreign Trade.
The subcommittees welcome all of you today and we'd like to
start with Ms. Hecker for her testimony.
TESTIMONY OF JAYETTA HECKER, DIRECTOR, INTER-
NATIONAL TRADE, FINANCE AND COMPETITIVENESS, GEN-
ERAL ACCOUNTING OFFICE
Ms. Hecker. Thank you, Mr. Chairmen. I want to thank you for
the opportunity to be here today to address SBA's role in meeting
the exports needs of small business, in light of the cut in SBA re-
sources and the proposal to reduce the coverage provided by 7(a)
loans.
Today, I will talk about three things: First, kind of the back-
ground of SBA's moving out on providing export working capital as-
sistance for small business; second, I'll provide some comments on
the proposal to lower the guaranteed subsidy; and finally, and per-
haps it's a bit tangential for today, we have a few ideas if the Con-
gress is interested, in other ways to try to minimize the potential
adverse effects of reducing the resources available to the Export
Working Capital Program and to better leverage those resources.
On the first point, I think it's almost ironic that there is a call
to cut the resources available for Export Working Capital precisely
at the time when the SBA has finally moved aggressively to pro-
vide such assistance to small business.
This program has been authorized for over 15 years. The first 10
years of the program there was an average of about 16 guarantees
a year. In the early 90's, some improvements were made and it
went up to about 80 guarantees provided per year. As Mr. LaFalce
has said, the number of guarantees has skyrocketed in the 1995 pe-
riod. Furthermore, the projections are that the number of guaran-
tees will actually triple over the 1994 period.
So there is clearly a new commitment by the SBA to move ag-
gressively in this area. That commitment has been demonstrated
in issuance of new guidelines, ambitious goals for all of their staff
in this area, the aggressive effort to progress on harmonization, the
effort to utilize these new one-stop shops, also, new cofinancing
agreements with States.
On the proposal to lower the guaranteed subsidy, we think it
clearly presents special and unique problems for export assistance.
The export programs have different objectives, have a different
time horizon, and have fewer banks participating in that side of
the program.
In general, the banks have higher risks and lower profits in this
type of business than other 7(a) loans, and importantly, there's no
secondary market. So, export guarantees are very distinctive and
we think there is an argument that clearly can be made for dif-
ferent treatment of export credit guarantee, relative to the rest of
7(a) Programs. So, ironically, the very effect of trying to lower the
guarantee to better leverage the resources could, in fact, result in
a total reduction of the numbers of export working capital guaran-
tees provided for small businesses.
The other remarks that we have are, perhaps, less on point, but
we think it's interesting to look at the potential to increase the fees
charged to the lenders. That has not been harmonized and there's
some interesting differences there. In addition, we think there are
opportunities to better leverage State resources.
There are a number of States active in the area and we think
there's opportunities for SBA to increase its role as a catalyst in
increasing State financing for small business and other export fi-
nance. Finally, there's an organizational change, really, on the
table with the recommendation by the TPCC for an evaluation of
the progress of harmonization. We think the Congress might be in-
terested in the scope and quality of that study, because it really
should provide some more detail and analysis on the relative per-
formance of the continued overlap by SBA and Eximbank in provid-
ing export financing assistance for small business.
That concludes my statement. I'd be very happy to answer any
questions.
[Ms. Hecker's statement may be found in the appendix.]
Chairman Torkildsen. Thank you, Ms. Hecker. We'll hold ques-
tions until after all witnesses have testified. Now, we'd like to ask
Ms. Pulley for her testimony.
TESTIMONY OF CASSANDRA PULLEY, DEPUTY
ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION
Ms. Pulley. Thank you, Chairman Torkildsen and Chairman
Manzullo. I'd like to submit my written testimony for the record
and briefly provide some comments, if I may, in summary.
Chairman Torkildsen, Without objection, your testimony and all
witnesses' testimony will be printed in full, and a summary is ap-
preciated.
Ms. Pulley. I'm pleased to talk to you this morning, briefly,
about a program that, although it's still in its infancy, is, I believe,
a resounding success. The Export Working Capital Program, which
was borne of the efforts of the Trade Promotion Coordinating Com-
mittee, shows what can happen when two Federal agencies join
forces to meet the needs of the small business community. As Mr.
LaFalce mentioned, during the 8-year period between fiscal 1983
and 1990, SBA approved 161 export working capital guarantees,
worth about $45 million. In the 11-month period of fiscal 1995, we
have approved 156 loan guarantees worth nearly $52 million, an
increase, even since your figures, Mr. LaFalce.
Currently, we have 149 banks approved to participate in this
program and we have cooperative agreements with three States:
California, Florida, and Kansas, which will enable us to co-guaran-
tee State government sponsored export trade transactions for small
businesses.
Among all Government agencies, SBA is uniquely qualified to
provide an incentive to commercial lenders to provide export fi-
nancing assistance to small businesses. Not only do we have a de-
livery system that includes our nationwide network of branches
and district offices, we have over 900 small business development
centers throughout the country, we have a cadre of 13,000 SCORE
volunteers who are available to provide the support and assistance
that small businesses need to structure and to package export
transactions.
In addition to that, under the auspices of the Trade Promotion
Coordinating Committee, we've trained over 300 of our employees
in transaction-based financing, as opposed to term financing, which
is SBA's traditional method of providing support and assistance.
Some of these employees will be located in, yet, another delivery
system that we have, the U.S. Export Assistance Centers, nine of
which are already in place. Six more are planned by the end of this
calendar year.
As I mentioned earlier, although this program is still in its in-
fancy, and in spite of its success, there is still a lot of room for im-
provement. For example, in transaction financing, speedy turn-
around is crucial, particularly because of the time sensitivity of
these transactions. Recognizing this, we're working very closely
with Mr. Cummins of BAFT to find ways to continue to improve
and streamline both the program and the process.
As part of this effort, we are delegating loan approval authority
to our staff in the USEAC's, once they become fully operational,
and we're negotiating with other States to develop cooperative ar-
rangements so that we can do co-financing.
There's been some concern expressed about the 90 percent guar-
antee rate and the impact it will have on the agency's subsidy rate.
Even if the Export Working Capital Program doubles in fiscal year
1996, it will still represent less than 1 percent of the total 7(a) loan
portfolio. As a result, the guarantee percentage will not have an
impact on the subsidy rate.
The guarantee percentage is, however, necessary to support com-
mercial lenders' efforts to provide export financing to small busi-
nesses. As Ms. Hecker mentioned, because of the short-term nature
of this loan financing, it's not possible for the banks to recover their
costs on these smaller transactions.
Also as mentioned by Ms. Hecker, the efforts at harmonization
between Eximbank and SEA have been very successful, as dem-
onstrated by the marked increase in the number of export working
capital guarantees that we have been providing. That means small
businesses are increasing their participation in the global economy.
The need for this program is also voiced by the small business
community, it was one of the recommendations for the recent
White House Conference on Small Business. The SBA believes that
this pro-am is an important tool in our ability to provide support
and assistance to the fastest growing segment of the American
economy which is, in fact, small business. Like Ms. Hecker, I'm
available for any questions.
[Ms. Pulley's statement may be found in the appendix.]
Chairman TORKILDSEN. Thank you for your testimony. I'd like to
applaud both of our first witnesses for their brevity in the sum-
mary. It's very appreciated by all members of the subcommittee. I'd
like to turn to Mr. Kamarck for his testimony.
TESTIMONY OF MARTIN A. KAMARCK, VICE CHAIRMAN,
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Kamarck, Duly noted, Mr. Chairman. Chairman Manzullo,
Chairman Torkildsen, members of the subcommittee and full com-
mittee, I'm delighted to be able to appear today to attest to our
progress in the partnership among Eximbank, SBA and the Na-
tion's lenders to small business in a harmonized export working
capital program.
Small business is a top priority for the administration of Chair-
man Ken Brody and myself at Eximbank. We are pleased and
proud of our success to date under the leadership of our director,
Maria Haley, who is responsible for our small business programs.
A very important part of that initiative for us has been this part-
nership in a harmonized program.
I will talk about three key points as to why this program is im-
portant and why a seamless partnership is important. First, the
need for the program. Second, the problem that the program is in-
tended to solve. Third, the importance, particularly, of SBA's par-
ticipation and full partnership in a seamless harmonized program
for the success of solving that problem and meeting the need.
With respect to the need for the program, make no mistake, this
is a program that is targeted quite specifically to the needs of the
small business exporter. Eximbank is not constrained as SEA is
with respect to the size of the loans that can be supported or the
size of the businesses that can benefit from the program. Yet, con-
sistently, year after year, between 90 and 95 percent of the usage
of our program is by SBA-qualified small businesses.
The reason for tnat is quite simple. To get into exporting, for a
business, exporting represents the good news of expanded oppor-
tunity for increased sales. The bad news is that there's a commen-
surate need for increased working capital. If you're going to signifi-
cantly increase your sales, there's going to be a need for more in-
ventory, more workers, for a financing of the accounts receivables
that are generated. Yet, those are exactly the kinds of assets that
are most difficult for commercial banks to get their arms around
and to accept as part of a lending base for a working capital pro-
gram, all the more so for small businesses.
It is exactly that gap in the availability of working capital in the
market place that this program is quite specifically targeted to fill.
Second of all, the problem that it's intended to solve is that of
lending to small business generally and against these kinds of as-
sets specifically by commercial banks. Bill Cummins, I'm sure, can
speak more authoritatively about this.
But if you think about what a lender looks at when it looks at
a potential line of business, because they don't look at one trans-
action after another, they're thinking about committing resources
to support a line of business. They're looking at their fixed cost,
which will vary from bank to bank but will be the same allocation
to a small loan, as to a big loan, or a small business or a big busi-
ness; to their cost of funds, which will vary, and the market rates
of interest that they can charge; which will give them a positive or
negative spread. All of those things are determined, pretty much,
by the cost structure of the bank and by the market place.
But here, we have an additional factor, which is that there's also
the risk adjusted cost of their capital. When they are putting an
asset on their books and they're making a loan, how risky is it?
How much of their capital is at risk in that loan? If you're talking
about decreasing the coverage of a Government guarantee to sup-
port a loan to a small business in this context, you're talking about
increasing the risk weighing under the regulatory scheme for a
bank, all in for the entire 100 percent loan, from 28 percent to 36
percent. That's a 28 percent increase in the cost to the bank of
booking this particular loan.
I would suggest to you that at the margin, and the important
margin, of promoting exports by small businesses, which is where
the jobs are created, which is where the technology is developed,
which is where the future of our Nation's economy rests, that 28
percent increase in cost for a bank looking at whether or not
they're going to commit the resources to support a small business
lending program under a Government auspices can be the dif-
ference between success or failure.
Finally, the importance of SBA to making this harmonized pro-
gram work, the importance of this is the difference between being
in Washington and being on Main Street. Eximbank has 450, now
440, employees, most of them in Washington, DC. We have a lim-
ited administrative budget, and we are oriented toward processing
our transactions.
SBA has a mission of helping small business. SBA has the
SCORE volunteers, the Small Business Development Centers and
their district offices across the country. They are there to help
small businesses. Small businesses know those people, know where
to find them and they have the delivery mechanism for reaching
out and dealing with the smaller businesses in the country. If we
disadvantage SBA in terms of their full participation in this part-
nership of a harmonized program, we're also making it much less
effective for partnership with the banks and for outreach to the
small businesses that need this program. By way of history, this
is not a new problem that we have just discovered and started to
work on solving. This has been perceived as a problem in a whole
in the coverage of Government programs for the benefit of small
business exporters for quite some time.
Chairman John Macomber, the previous chairman of Eximbank
under the last administration, noted this problem and took steps
to try and solve it in 1992, unilaterally, on the part of Eximbank,
by raising the Eximbank working capital guarantee percentage to
100 percent.
Interestingly enough, it didn't make very much of a difference in
the volume that we saw as a result. Why? We looked into this
when we came into office and said this should have prompted an
increase in availability of the program. The answer was that small
businesses and banks found the program still confusing, com-
plicated and not user friendly.
We, working hand-in-hand with SBA have tried very hard to
solve that problem. We believe we've succeeded. We're undertaking,
right now, a study to do a program review. I will go out on a limb
and tell you that I predict that that study will show that we are
being very successful. It may well lead to ways in which we can
improve. But at this point, when we're seeing real progress for the
first time in years, in usage of the program, Eximbank's and SBA's,
it would be a mistake, I believe, to backtrack and to undo one of
the seams in the web we've woven in the partnership between the
lenders, Eximbank and SBA. Thank you.
[Mr. Kamarck's statement may be found in the appendix.l
Chairman Torkildsen. Thank you for your testimony. Mr.
Cummins.
TESTIMONY OF WILLIAM C. CUMMINS, BANKER'S
ASSOCIATION ON FOREIGN TRADE [BAFT]
Mr. Cummins. Good morning, respective Chairmen, members of
the subcommittees and of the full committee. It's a pleasure to be
here in representing the Banker's Association on Foreign Trade,
commonly known as BAFT. BAFT is one of the country's oldest fi-
nancial trade association and our membership includes virtually all
U.S. Banks that are active in international banking.
I'm Cochairman of the Small Business Export Finance Commit-
tee and our members are very active in both programs that we're
speaking of today.
I would like to summarize three key points that I prepared in the
written testimony that are of significant concern to tne member-
ship of the small business committee at BAFT.
The first concern is the historical perception of the program's in-
stability. For several years leading up to the harmonized SBA
Eximbank program in 1994, there was ongoing tinkering with both
programs, resulting in an image of these programs as being very
unstable, unreliable and simply confusing.
There was the definite risk that once a bank and an exporter en-
tered one of the programs, that the program could be changed in
midstream. Keep in mind, that although these guarantees are often
issued for one commitment supporting a revolving credit line, the
underlying relationships are, in fact, for many years. The assump-
tion is if tne exporter performs satisfactorily the credit line will be
renewed year, after year, after year. It's important that the pro-
grams be there year after year and that the program parameters
are consistent. To change the program, yet, again, could serve to
rekindle the negative use in the industry of these programs' reli-
ability.
The second concern is the inadvertent competitive advantage we
think banks would have that enjoyed delegated authority under the
Eximbank Program. With a reduction of the SBA's Program Guar-
antee, banks which enjoyed delegated authority under the
Eximbank program will enjoy an immediate competitive advantage
in the market place, as this guarantee is at 90 percent. This dis-
parity will yield an undue edge for these banks and it will be a fur-
ther disincentive for new banks to enter the field and will certainly
discriminate against those companies that are seeking smaller
loans under $750,000.
Third, and most importantly, there is the concern of the credit
considerations, the credit impact, by reducing the guarantee cov-
erage. Done correctly, small business finance requires a hybrid
blend of finance expertise, combining the technical knowledge of
international banking cross border payments and understanding
the risk of selling overseas, with the seasoned credit skills of asset-
based lending.
Quite frankly, there are many banks around the country in many
markets who have not developed this hybrid blend of financial ex-
pertise yet. So, there is the need for this, if you will, an incubator
program for not only the exporter, but for the bankers, as well, as
we learn and become accustomed with this growing, but unique
area of small business export finance.
Many transactions now done by participating banks would sim-
ply not be done with a guarantee of 75 or 80 percent. There are
three reasons, I think. One is that many borrowers that we see
under this program simply do not have an established track record
yet of success and profitability. We often see initial balance sheets
that are very leveraged, very undercapitalized.
Second, and again, the collateral for these programs is typically
inventory and receivables. Our inventory is usually in transit in
route to Saudi Arabia or Hong Kong and our receivable may be
coming from Bolivia or Botswana. If you've ever had to liquidate
one of these loans in distress you realize the transitory, illusive na-
ture of this collateral.
Third, there's an issue, I think, of culture and experience that
most banks approve these loans in a committee process. I wish you
could only join me in loan committee and try to explain one of
these transactions to a gentleman or a gal who has come up the
conventional route in banking, commercial real estate, corporate
lending or retail banking. They do not have a clue as to how these
transactions should be structured and what the risks actually are.
But they do know the SBA and Eximbank, and they do have com-
fort and confidence that even if they don't understand the credit
risk being presented, there is a Government guarantee and they
can vote yes to see that the transaction gets done. That is the heart
of the issue.
If this enhancement is inadequate these people will vote no on
the loan committee. Thank you.
[Mr. Cummins' statement may be found in the appendix.]
Chairman TORKILDSEN. I want to thank all witnesses for their
testimony, and I'll start off with two question of my own of Mr.
Kamarck.
If the volume didn't change and there was a 100 percent guaran-
tee change to 90, what would lead you to expect there would be a
change if the guarantee were reduced to 75 percent?
Mr. Kamarck. What we found when we asked that question, that
is, why didn't the volume change significantly, was that there was
resistance, ignorance and confusion in the market place about how
our guarantee worked; what one needed to do to apply for it; and
what we would do if there were a claim. There was no outreach to
the banks and through the banks to the small business community
to sell the availability of this program to meet needs.
We have addressed all of those concerns. The study that we will
be undertaking shortly will tell us how well we've done. The evi-
dence is, in terms of increased volume, significantly increased vol-
ume in both agencies, is that it seems positive. The point is that
I don't think that there's a lot more that can be wrung out of those
kinds of changes. A more important point is that in doing all that,
we brought the guarantee down to 90 percent and sold it to the
banks on the thesis that you now have a predictable, dependable
partner with a 90 percent guarantee, an enhanced guarantee, a
simplified application process and, in Eximbank's case, a qualified
delegated authority.
10
We now go back to them and say well, if you have to do the SBA
Program then it will be 80 or 75 percent, we will have substantially
undercut, I think, that investment in building the outreach part-
nership, on which I think our success rests.
Chairman Torkildsen, Given the first part of your answer,
though, wouldn't that tend to underscore that what the guarantee
rate was, was not as important as having people understand, espe-
cially for those banks that are not familiar with this particular pro-
gram, the guarantee portion of debt is resalable on the secondary
market. If individuals know in advance what the guarantee per-
centage is, wouldn't your answer that you just gave in the answer
indicate that as much, if not more, of the problem was a lack of
understanding of how the program worked and not the specific per-
centage of guarantee?
Mr. Cummins. In the past, Mr. Chairman, there was a good deal
of truth to what you said. But in coming up with the 90 percent
number, we worked closely with the banks, doing the kind of cal-
culations that I described earlier in terms of where their profit-
ability was and where that cutoff line was that would get them into
the program.
Because if we were going to do delegate authority we had to have
risk sharing. We could not have 100 percent guarantee. Then the
question was how much less than 100 percent could it be. We came
down to 90 and SBA came up to 90 because there was a quite con-
scious and principled decisionmaking that that's where, for the ma-
jority of banks, they could do the business profitably.
Chairman Torkildsen. Ms. Pulley, earlier this year President
Clinton called for making SBA, I believe, "self-financing." I don't
know if that was his exact term or not but something along those
lines. As we all know, the only two ways to achieve that are to re-
duce the subsidy rate or increase the fees, or some combination of
the two.
If that objective is to be obtained how could this program remain
at 90 percent, how can the SBA become self-financing, which if nei-
ther the House or the Senate is prepared to reduce the subsidy,
how can we get to a self-financing program without changes of that
type in programs?
Ms. Pulley. Mr. Chairman, you're right. The President did rec-
ommend that in our budget submission and included a zero subsidy
rate for the 7(a) and 504 Programs. What we are proposing to do
is a combination of fees and improving our recovery rate as we
move forward.
This program, perhaps, has the potential for being self-financing,
but I think the important thing to note with this part of it is two
things: First of all, it is a very small portion of the 7(a) Program
and the guarantee percent itself does not impact the subsidy rate
because it is such a small percentage.
The second thing is, this program is a pilot. Recognizing the his-
tory of the Export Working Capital Program at SBA, particularly
the cumbersomeness, the lack of understanding the program, the
lack of high level support in the agency for the program, we have
to demonstrate that the Government is a reliable partner to the ex-
port lenders. I think that's the most important thing. We have to
11
get a program out there that works for them, that is there when
they need it and that works for their customers.
We have made significant progress in 11 months. But we still
have the study to undertake on harmonization. We continue to
work with BAFT to see if there are ways we can streamline the
program to make it friendlier. So, I think that as we move forward
with this program and as we institutionalize the Export Working
Capital Program, if you will, certainly, there are ways that we can
make this small pilot as self-financing as our regular 7(a) Program
is going to be.
Chairman ToRKlLDSEN. For my final question for everyone on the
panel: Given the disparity that Mr. Kamarck pointed out in pref-
erence to have a higher level of guarantee fi*om Eximbank than you
do from SBA, keeping 90 percent for this program, we would have
different levels of guarantee for the 7(a) Program overall, versus
this, and what would be the effects of telling the small business
community that if you want to make compact disk equipment, or
something, if you export it we'll give you 100 guarantee than if you
sell it to Americans.
Isn't that going to create a distortion in the market place where
someone who is producing goods and services domestically is told
that they have a lower guarantee rate than if they market their
goods and services overseas?
Ms. Pulley. I think, basically, you have to look at the difference
in the programs. The regular 7(a) Program is term financing. It's
not transaction financing. So, it's not limited to whether the com-
pany just wants to make compact disks. A company can borrow
general purpose, long-term financing.
The export working capital program is specifically transaction
based and it involves, as Mr. Cummins said, a line of business over
a period of time but is related to a specific transaction, so that you
can't really equate either the terms, the loans or the guarantees.
You have to really look at the specifics. For a company that
wants to make compact disks and sell them in the United States
we can give them term financing. But then, and the important
thing for us, we can also assist that company that wants to make
compact disks and export them to Japan. That's why this program
is so important to the SBA as one of the tools in which it provides
support and assistance to small business.
Mr. Kamarck. I, obviously, can't speak to the SBA's administra-
tive point about this as Ms. Pulley has, eloquently. But fi'om the
exporter's point of view, in terms of confusion in the market place,
when I first came to Eximbank and I looked at this program I said,
well, this looks like an anomaly.
This is a program where we are financing exporters instead of
exports. Why is that?
The answer was that, in fact, the Working Capital Guarantee
Program is a program for financing exports. It is a program for pro-
viding working capital for smaller businesses to make specific ex-
port sales. It's quite distinguishable from their longer term capital
needs. They think about it differently and they structure their bal-
ance sheets around it differently. In terms of going to different pro-
grams to meet those different needs, I really don't believe it will
cause any confusion or problem in the market place.
12
Mr. CuMMENS. If I may comment, to reiterate that I think your
question is not comparing apples to apples. I do believe it's compar-
ing two different types of financing. It would be the CD. manufac-
turer requesting financing for building equipment on a term basis,
versus requesting short-term financing for inventory and receiv-
ables financing.
The former, again, has collateral that is tangible, it's there and
it generally has lower risk. Therefore, a lower guarantee percent-
age will work, I think, in the conventional term financing programs
of the SBA. In the short term programs the higher guarantee is
prerequisite, due to the lower quality of the collateral, particularly
export related inventory and receivables, again, are very transitory,
very, very difficult to liquidate in distress situations.
Chairman TORKILDSEN. I'm not sure if, given the answers, per-
haps I made my point clear where the differences are.
If there's going to be some type of shift in the market between
having a higher guarantee for Eximbank than under this SBA Pro-
gram, wouldn't there also be a shift in the market if the SBA has
two different guarantee rates, one for exports, one for 7(a)?
Now, I understand that the 7(a) Loan Program can be used for
other purposes. It's not goods-specific. It's not as targeted or limited
as the export program. But do all of you believe that there would
not be a shift, there would not be an incentive for individuals to
say, well, if I gear for exports — and we're all interested in increas-
ing exports from this country — are you going to see a shift there,
and if you do, would you still expect that the program will remain
at less than 1 percent of the entire 7(a) Program?
Ms. Pulley. I don't think, Mr. Chairman, that a 10 percent dif-
ference in the guarantee is going to cause a business person to
change the nature of their business. Those companies that are ex-
porting, who are interested in exporting, will find this program at-
tractive. For those companies that are not export-ready or are not
interested in exporting, a 10 percent guarantee from the Govern-
ment, for which they'll have to pay, will not really make the dif-
ference.
Mr, Kamarck. But with a lower guarantee percentage those com-
panies that are on the bubble may not get their loan at all. Those
that are on the other side of the bubble, so to speak, may get their
loan but it's going to be with much tighter credit standards, lower
advance rates on the collateral, as an example, and there's no
doubt that the pricing will be higher because of the increased risk.
Chairman Torkildsen. I have to cut myself off at this point, be-
cause I'm over my time. Give the chance to ask questions, turning
to the ranking minority member of the full committee, Mr. LaFalce,
for questions.
Mr. LaFalce. I think the hearing, so far, has transformed me
from an intellectual advocate of this position to a passionate advo-
cate of this position.
I think if we were to backtrack we would be doing something
that's just simply dumb, absolutely dumb. We had a lower guaran-
tee by SBA over the past and it just didn't work. Eximbank had
a 100 percent guarantee and it didn't work, for two decidedly dif-
ferent reasons, of course.
13
SBA had the delivery system but it didn't have an adequate pro-
gram. Eximbank, you have an adequate program but they didn't
have the deHvery system. Also, there just was no harmony between
them. Let's have an adequate guarantee and let's have an effective
delivery.
If you talk to small businesses in small-town America or in a big
city in America, they don't know any Eximbank. They don't deal
with the Eximbank. They know the SBA and deal with the SBA.
But not just the small business community. The banking commu-
nity.
How many banks are there in America? Only 11,000 or 12,000 —
very, very few of them have ever dealt with Eximbank. If they
have, that was probably a year or 2 or 5 years ago, and the loan
officer who handled that deal is no longer with them and they need
some kind of reeducation program.
I've been in Congress for a while so I've tried to help businesses
in my District. I remember this one very large business that had
a potential deal in Brazil. I tried working with the banks in the
Greater Buffalo in trying to finance a deal. It wasn't there. It was
just an uncomfortable feeling on the part of bankers. Why? Well,
for a whole slew of reasons.
It's not that they just didn't understand the financial arrange-
ments all that well, but the uncertainty of what is going on in
Brazil, the uncertainty of what is going on in Mexico, the uncer-
tainty about what's going on in Argentina, the uncertainty about
whats going on in Hong Kong or wherever it may be, leads a lot
of bankers to say well, I'll never, ever be in trouble for the loan I
didn't make.
The only way I'll ever get in trouble is for the loan I make, there-
fore, let me deal with what I know and what I'm comfortable with.
We're trying to change this. The SBA and Eximbank, working with
BAFT, the Banker's Association on Foreign Trade seems to have
arrived at a formula for success, therefore, let's change it. Well,
that doesn't make much sense to me.
Will it distort the market place? That's exactly what we want to
do. We want to create a special incentive for exports. The nature
of any guarantee program is that you will distort the market place.
By definition, any guarantee program of any governmental agency
is, to a certain extent, a distortion of the market. The question is
how do you want to?
Well, we've made the judgment that we want to effect the market
place to advantage exports. There's a whole slew of reasons for
that, and I won't go into all of them now. Because, by and large,
it's exports where we are in competition with the international
market place, with people who produce and sell from Japan where
export incentives are far greater than the United States, where
producers from Germany, from France, et cetera, where export in-
centives are far, far greater than in the United States.
Were we to backtrack now on something that offers hope to the
small business community, a proven track record over at least a pe-
riod of 1 year, would be tantamount to unilateral disarmament, in
that it is of such insignificant financial consequence that it's almost
impossible to discern on the ledger and the only reason to do it
would be because of ideological rigidity. Actually, not even that be-
14
cause once you give a guarantee, whether it's 80 or 90 percent,
you're pregnant. If you're pregnant, make it a healthy baby.
The two chairmen are the ones who have determined who testi-
fies, and if they couldn't find anybody to testify in favor of a lower
guarantee, maybe that's proof that there is consensus in the real
world. That's the question. What do you think about that?
Chairman Manzulix). I have some questions that really go to the
heart of the issue. I'm not talking about harmonization program.
That is whether the decrease of the guarantee rate of Eximbank to
the levels of the SBA. You're talking about harmonization. I wrote
down the word hybrid, partnership, harmonize, seamless, improved
and reinvent. But does SBA and Eximbank charge the same fees
to customers?
Mr. Cummins. Under the harmonized program, yes. Previously,
they did not.
Chairman Manzullo. You said yes and Ms. Pulley is nodding no.
Is the customer charged the same rate as a percentage of the loan?
Mr. Cummins. That was one of the features of the harmonization.
Chairman MANZULLO. So, it's essentially the same fees. Is that
correct?
Mr. CUMMENS. That's correct.
Chairman Manzullo. GAO is next.
Ms. Hecker. It's hard to disagree with a banker who has per-
sonal experience. But our understanding is that SBA's fees are .25
percent for a guarantee that's under 12 months. Eximbank's fee,
for under 6 months — they have two different rates for under 6
months and one for 7 to 12 months. The under 6 months is .75 per-
cent, .25 of which goes to Eximbank, and .50, which goes to the
bank. They have a different fee, higher fee, 1.5 if it's 7 to 12
months. That also has a split; .25 goes to Eximbank and 1.25 goes
to the lender.
Mr. Kamarck. The split fees are only for delegated authority
where the bank does all of the processing.
Mr. Cummins. The fees that the bank keeps are optional. The
part that has to be charged to the borrower is exactly what has to
be charged under the SBA Program as well.
Ms. PtJLLEY. The answer to your question is that fees we collect
are the same. The difference is the fees that go to the banks.
Eximbank is splitting its fees with the banks and we do not.
Chairman Manzullo. But is the customer charged the same?
Ms. Pulley. No.
Chairman Manzullo. It's such a simple question.
Mr. LaFalce. It's a simple answer too.
Mr. Cummins. I speak to my experience with it. The way the del-
egated authority program is structured, it allows us to charge the
identical guarantee as that under the SBA Program.
Chairman Manzullo. Because you do all the work?
Mr. Cummins. Largely speaking.
Chairman Manzullo. Is the person who gets the loan for under
$750,000 from the SBA and the one who gets the loan for over
$750,000 from Eximbank charged the same percentage?
Ms. Pulley. It depends.
Mr. Cummins. It depends. If you're talking about over $750,000
and whether or not that guarantee at Eximbank is obtained
15
through a delegated authority lender, or if it is obtained directly
from Eximbank.
Chairman Manzullo. Why should it make any difference?
Mr. Cummins. Because under the delegated authority program
there's flexibility to allow the retention of the fee by the bank —
part of the fee — and that retained portion can be negotiated with
the borrower.
Chairman Manzullo. How many banks have delegated authority
at Eximbank?
Mr. Kamarck. I think it's 32 at this point.
Chairman Manzullo. So, it's negotiable? The borrower goes into
a bank and he wants a loan in excess of three-quarters of a million
dollars. Now he may have found out for the first time at this hear-
ing that he can negotiate certain percentages.
Mr. Kamarck. The fees and interest rate and other terms of the
loan are always fully negotiable in all circumstances. What we're
talking about is what fee we want to receive out of the deal.
But we're offering a guarantee that the transaction — the loan
transaction is between bank and borrower. That's what the market
will bear and what the relationship merits.
Chairman Manzullo. Let me put it in terms of a hypothetical
construct: Somebody has a contract to sell barrels to Italy in which
to put wine in
Mr. LaFalce. What Italian is going to buy an American wine?
Chairman Manzullo. I said that because if I used pasta or
brought up our ethnic background you probably could relate to
that.
But let's take that and let's say day one is $700,000, on day two,
it's raised to $800,000. On day one he goes to SBA and he says,
well, I really need $800,000, so he goes to Eximbank. It's going to
be a different percentage that he'll be charged to get his loan?
Mr. Cummins. Depending on the bank, it's possible.
Chairman Manzullo. That doesn't seem like a very seamless,
harmonized policy. You have different charges.
Mr. Kamarck. A couple of points, Mr. Chairman. First of all, the
borrower is dealing with this bank and he's saying: Here's what I
need, what will you charge me — interest fees and so on.
Now, in terms of the fee structure, whether the guarantee is
going to be provided by Eximbank or SBA, and whether it's dele-
gated authority or not delegated — and I've been corrected by staff.
We now have 53 banks in 22 States with delegated authority, for
the record. The fees that are quoted to the borrower may well be
different.
I should also say that while I remembered the colloquy with SBA
about fees as part of the harmonization program, clearly, we didn't
go the full distance in getting those harmonized. It's part of every-
thing we're doing at Eximbank. We are looking and we're doing
transaction pricing across all of our programs. One of the things
that we will be doing in our program this year for the Working
Capital Guarantee Program is looking at the pricing of this to see
if we can reduce our subsidy, to see what the realities of the mar-
ket place are, how much the borrower is paying and how much the
banks are pocketing and so on. But that is still a story in progress.
16
Chairman Manzullo. Do you want to say something, Ms. Pul-
ley?
Ms. Pulley. If I may clarify one point?
Chairman Manzullo. Sure. Of course.
Ms. Pulley. I'd like to reiterate a point I made to Chairman
Torkildsen and that was that for SBA, this is still a pilot program.
We have 11 months experience with this program. If you will, we're
still trying to get it right.
We recognize that, as I addressed this issue about making our
program self-financing, that once we institutionalize this program
it will become part of our 7(a) Program and therefore, we have to
honor our commitment to reach zero subsidy rate. So, we will have
to look at the fee adjustment. But right now, in terms of where
we're going, the difference between our delivery system, the way
we are processing these loans, and the way SBA is processing
them, is different. That allows us to have the different pricing
mechanism until we get all the kinks out and develop an institu-
tional method for delivering the program. That's part of the harmo-
nization process.
Chairman Manzullo. I received a letter here from the National
Association of Government Guaranteed Lenders, signed by An-
thony Wilkinson who's the president and CEO. He said that EWCP
has had very little usage, even though it had the highest guarantee
percentage available for the SBA. Clearly, a 90 percent guarantee
is not what determines whether a lender will or will not participate
in the EWCP.
In August his organization polled several lenders who have used
or attempted to use the program. The response we received was
that it was not the guarantee that was the deciding factor but,
rather, the knowledge of the program by the lender, the knowledge
of the program by the SBA loan officer, the ease of utilizing the
program, and if there was another loan program that better meets
the customer's needs, e.g., faster application and response time.
Then a communication that I received from C.S. Johnson Co.
from Champaign, Illinois, where they were very unsatisfied with
the service of the Eximbank and went to the SBA to seek a lower
amount. I guess what I'm looking at here is keeping these loans at
the SBA based upon the $750,000 amount. This $750,000 figure
has some type of magic to it. I don't know where that figure came
in, but I would suggest that perhaps Eximbank do all the lending
in the area of export financing and defer or act upon recommenda-
tion by SBA that could do the counseling and support services as-
pect of the loan.
That's the best way to harmonize it because Eximbank doesn't
have the personnel or the time or the expertise in working with the
smaller companies that want to export. Eximbank does not have
SCORE. Eximbank is more ledger-sheet oriented and SBA is more
transaction oriented or has more heart, as opposed to cold sterile
figures.
Perhaps there's some way that the two organizations can work
better on that basis. I realize the bigger banks don't want to proc-
ess small loans but that's tough bananas. If you want to do some
of these investments and you've got to worry about a $1,500 stu-
dent loan, nobody likes to worry about those things.
17
But I just think that when you look at the small amount of SBA
loans— Ms. Hecker, what is it? Something over 100 loans so far in
the program?
Ms. Pulley. One Hundred Fifty Six in 11 months.
Chairman Manzullo. That's a relatively small amount. That
would come out, if you, for example, used the 55 or 56 banks that
have the delegated authority, which comes up to about three loans
per institution per year. That's a fairly small amount. Any com-
ments?
Ms. Pulley. A couple of things. Let me try to address each of
your points.
First of all, in terms of the letter with NAGGL, we're very famil-
iar with NAGGL. We work very closely with them. But NAGGL
primarily represents real estate banks. We have worked, from the
very beginning, with BAFT. Thev are the organization that rep-
resents oanks in the export working capital and trade financing
areas.
I certainly appreciate Mr. Wilkinson's comments but, again, I
would say that, by and large, the banks that are members of
NAGGL are not the banks that are heavily involved in the inter-
national trade financing.
Mr. LaFalce. I wonder if I could just interrupt a few seconds.
I have spoken on inumerable occasions before NAGGL and before
BAFT. I have yet to meet a bank that belonged to NAGGL that be-
longed to BAFT, and I've yet to meet a bank that belonged to
BAFT that belonged to NAGGL.
Of course, if you have a low guarantee for a BAFT bank then
NAGGL banks might think it's less of a loan for them. Just a
thought.
Ms. Pulley. In terms of the $750,000 cutoff as to where the loan
goes, whether it's Eximbank or SBA, basically the cutoff is consist-
ent with SBA's legislative authority and the size of the loan guar-
antee we can provide.
Certainly, this fiscal year, as we tried to manage our 7(a) funds —
we made an administrative decision to lower that amount to
$500,000. But, again, because the Export Working Capital Program
is, a pilot and because of the historical instability of this program,
we made a decision, with our committee's approval, to keep the
$750,000 limit for the export working capital, again, because we
were just getting the program started. But that became the distinc-
tion.
It was consistent with SBA's overall lending limit. In terms of
combining the program at either Eximbank or SBA, I think the im-
portant thing to keep in mind is the needs of our customers. Small
businesses, especially new to exporting small businesses, need
greater technical support and assistance.
SBA is able to provide that because of our resources and our de-
livery mechanisms. It is also a reason why our approach to financ-
ing is different. As Mr. Kamarck mentioned, Eximbank has 440
employees, mostly located in Washington, so they have to have a
different approach, but also because most of their customers are
more sophisticated, are more mature and are more established
businesses. A lot of our companies are startup companies. They're
new companies, so you've got to go out and kick the tires.
18
That's why we have the dehvery system we have, because our in-
volvement— maybe it's more warm and fuzzy, maybe it's more
heartfelt. But it is simply the nature of our business. That's who
our customers are. So, our business has to be tailored to meet the
needs and demands of our customers.
So that I think that, as Mr. LaFalce said, we figured out a strat-
egy that works here. It serves the large companies that are
Eximbank's traditional business and meets their administrative
and organizational structure. It serves smaller businesses, which
our delivery system and our structure is better able to accommo-
date.
Chairman Manzullo. Mrs. Clayton.
Mrs. Clayton. Thank you. I wish to thank the chairs for having
this continuation of the exploration of the idea. The purpose of this
was to see if there an opportunity, consistent, I guess, with Mr. La-
Falce's attempt earlier, to make some exception for reducing the
amount of the subsidy in exporting, in particular SBA.
So that the purpose for this hearing was to see if there was any
need for it or would there be any problems with it. I think the
record is clearly shown by those who have testified today and by
your written testimony that, indeed — Mr. Cummins, I think, has
made a very salient point is that stability is very important in this
area. Two, I think Ms. Hecker made the observation earlier on that
probably the barrier that has to be overcome early on is the avail-
ability of capital.
Mr. Cummins, I'm sure just said mistakenly when he said gentle-
men and gals, and I iust picked that up that he probably meant
to say gentlemen and ladies.
By the way, I was one of those who sat on those committees. I'm
not a banker but I've served in the banking business so I know a
little bit about the confusion in trying to understand. You are cor-
rect that many of us who served in that capacity on a board or
banking committee and approved loans it was confusing.
So if you now have a program that is working, apparently, and
I have to just accept your word that the harmonizing program has
brought together some desperate and good points and made it easi-
er for the small business — Mr. Chairman, I would think 156 in 11
months is a pretty good record. So, if you are trying to reduce the
subsidy to have an impact on the budget, this is the wrong place
to do it.
If we're trying to say is there a need to have a difference in what
we do domestic and foreign, I think there is a reason why because
capital is a stumbling. We also know the opportunity for small
business is lower in the foreign markets. So, we want to make it
easv for small business people to do that. So, you couple the SBA
and. the Eximbank together and it makes it easier for bankers to
do that.
By the way, bankers are not known to be terribly inventive. If
you say they're in creating financing, they say they're not a banker.
So, they wouldn't have thought of bringing these two together, so
you have to make it easy for them to do it. There are some bankers
who would say that this particular doesn't make sense.
I'm encouraging bankers in my area, because I have an interest
in banking and have spoken to our North Carolina Bankers about
19
getting into this. North CaroHna is not known to be small potatoes
in the banking community. So, if we're not active, then I know na-
tionwide, it's not surprising that you don't have a lot of bankers.
Mr. Chairman, I just want to go on record saying that both the
testimony, as well as the reason why we reconvened this hearing
is to see if there was some reason why there ought to be a distinc-
tion in how we approach the subcommittee for the SBA — one, it's
not going to have a significant in the budgetary concerns which
we're all trying to do. So, we're not talking fiscal responsibility. It
is inconsistent for us not to give an incentive that would, indeed,
encourage small business and bankers to be in the business of ex-
ports. So, I want to commend you for having the hearing and I
think the statements speak for tnemselves.
Chairman Manzullo. I want to thank all of you for coming here.
Let me give you, the panelists, the chance to speak if there was
something that you wanted to add but did not have the oppor-
tunity.
Mr. Kamarck. One thing that I should put on the record, Mr.
Chairman, is that there are two, I think, factual inaccuracies in my
written statement for the record that have been pointed out to me
that we will hasten to correct in a letter to the subcommittee.
Chairman Manzullo. Don't worry about that. It's part of the
record. Anybody else?
We want to thank you all for coming here today. This is obvi-
ously a unique problem when somebody wants to export, he faces
a little different situation, depending upon the institution with
which he works, with either the SBA or the Eximbank.
We would keep the record open for 30 days for anybody who
wants to submit additional statements. I'm not convinced, laased
upon the testimony today, that lowering the rate guarantee will de-
crease the bank's willingness to make export loans. Because as I
look at the very unique character of these loans, these are contract
loans.
My understanding is that when somebody comes to a bank for a
pre-export working capital loan they have a contract that says, I
won this particular project, as opposed to financing the business,
as a whole. If you look at some of the history on these loans, the
maturity with the C.S. Johnson loan was 2 months. It was an
$800,000 loan. They had another one for $833,000. These are all
based upon projects. I've never been involved directly in the bank-
ing industry, but indirectly as an attorney who represented several
business.
When banks are faced with deciding to approve an export loan
they adequately secure themselves, by filing the appropriate forms
under the Universal Commercial Code. I'm just not convinced, and
I'm sorry, that a bank is going to deny the loan of this magnitude
based upon the fact that the guarantee rate will be lower. The
GAO came up with the same conclusion. Maybe it's because we're
only 11 months into the pilot program itself. Perhaps banks would
have to become more aggressive in securing their loans.
One thing we did not bring up today was the role of the Overseas
Private Investment Corporation (OPIC), which covers an invest-
ment if banks are really concerned about a loan that may be imper-
iled during the export to a foreign country.
20
You're shaking your heads on this, but to a certain extent, an
OPIC guarantee does make the loan safer if there's concern about
the nature of the country in which the investment is made. So, I
would like you to submit to us vour thoughts on this. Are loans in
the approval process at the SBA at risk under the FWCP program
because of lowering the guarantee rate? I'd like to see something
more than opinions.
Here is one opinion going one way and another opinion going the
other way. If Mr. Wilkinson were here he would shake his head
yes. Mr. Cummins, you shake your head no on it. But one thing
for sure is that Mrs. Meyers' bill will probably be enacted and be-
come law. This is not a perfect world. I'm still concerned very much
over the fact that there are different guarantee rates.
I can't go fully along with Mr. LaFalce's suggestion at this time.
I think it creates inconsistency in the law, different guarantee
rates, depending upon the type of loan.
Let me just ask a final question of Ms. Pulley. Is the SBA con-
cerned that if an exception is made in allowing Mr. LaFalce to
apply for exports that tnis will open the door to requests for other
exceptions?
Ms. Pulley. Are you asking if we have the 90 percent guarantee
for the Export Working Capital Program that there are going to be
exceptions?
Chairman Manzullo. Will there be other people saying for this
type of loan or that type of loan we should nave a similar excep-
tion?
Ms, Pulley. I think you have to look at the program and what
it serves. I don't think you can say that any financial institution,
whether it's Federal, State, or private, will have the same set of
terms and conditions for all finances. It depends on the risk profile,
the tenure of the loan, the borrower, any number of reasons.
I don't think we can take an across-the-board approach to any
loan program. I think we have tried to make a case here for why
there is a need for a different approach for this program. This pro-
gram is very different from most of SBA 7(a) loan programs.
Chairman Manzullo. We commend all of you, especially the
working partnership, between Eximbank and SBA on getting the
word out to the various businesses that these loans are available.
I think that's highly commendable because that has to be one of
the reasons why there have been 156 SBA export loans completed
in an 11-month period of time at $52 million. That's some com-
merce. But I am concerned about the disparity. That's the reason
why Mr. Torkildsen and I called for this special hearing today. I
don't know how it's going to be resolved. Perhaps that's something
that greater minds than ours present today can offer. But in any
case, let me leave the record open for 30 days, and you work on
it and come up with some suggestions, please submit them because
we would really appreciate that. The subcommittee is adjourned.
[Whereupon, at 11;20 a.m., the subcommittee was adjourned,
subject to the call of the chair.]
21
APPENDIX
Statement of Representative Eva Clayton
House Small Business Committee
Subcommittee on Procurement, Exports and Business Opportunities
and the
Subcommittee on Government Programs
A Joint Public Hearing
September 7, 1 995
Mr. Chairman, Just before the recess, the Full Committee marked-up H.R. 2150,
the Small Business Credit Efficiency Act of 1995. At that time, Mr. LaFalce
introduced an amendment that would restore to ninety percent the amount of a
guarantee on financing for one year or less under the Small Business
Administration's Export Working Capital Guarantee Program. Mr. LaFalce agreed to
withdraw the amendment on the condition that today's hearing would be held.
This is an important hearing and an important issue.
The SBA 7(a) Program is designed to provide greater access to capital for the small
business. It is the primary loan guarantee program for those small businesses
seeking commercial loans in an amount up to $750,000. Minorities and women
are prime beneficiaries of this loan guarantee program, as well a small exporters.
The Program has grown over the last five years. For Fiscal Year 1 995, the SBA is
expected to handle some 56,000 loans, totalling $7.8 billion. The SBA is not the
lender under this Program. Instead, it serves as a facilitator and guarantees a
percentage of a loan a small business might arrange with a commercial lending
institution.
The Bill, H.R. 2150, is designed to increase the leverage of government dollars
against private dollars and to reduce the subsidy rate for the 7(a) Program to
approximately one percent. This is accomplished in several ways, by increasing
the fees for loans sold; by reducing the guarantee on loans; by changing the
guarantee fee on loans; by repealing the provision that allows lenders to retain half
the fee on small and rural loans; and ny increasing the maximum loan amount and
adding to the fee in another loan program.
I support the LaFalce amendment because I believe it is consistent with the thrust
and spirit of H.R. 2150, while at the same time insuring that the goals of the 7(a)
Program are met. The LaFalce amendment continues in practice a policy with
which financial institutions, the government and participants alike have become
familiar. Considerable resources have been committed over the past year by both
SBA and the Ex-lm Bank in an effort to make the Program work. Much of that
effort will be lost with an abrupt, unnecessary change at this point.
I look forward to this hearing, Mr. Chairman. The Export Working Capital
Guarantee Program is vital to women, minorities and small exporters. We should
keep it working.
22
STATEMENT FOR CONGRESSMAN FLOYD H FLAKE
BEFORE THE JOINT SUBCOMMITTEE MEETING ON THE
EXPORTS WORKING CAPITAL PROGRAM
SEPTEMBER?, 1995
GOOD MORNING CHAIRMEN TORKILDSEN, MANZULLO AND MEMBERS OF
THE SUBCOMMITTEE ON GOVERNMENT PROGRAMS AND PROCUREMENT,
EXPORTS, AND BUSINESS OPPORTUNITIES. I AM PLEASED TO DISCUSS AND
EXPLORE THE IMPLICATIONS OF PROVIDING SMALL BUSINESSES WITH THE
NECESSARY TOOLS TO SUCCEED IN THE INTERNATIONAL MARKETPLACE
BECAUSE I UNDERSTAND THAT SMALL BUSINESSES ARE PIVOTAL TO THE
HEALTH OF THE US. ECONOMY. IT IS IMPERATIVE THAT WE UNDERSTAND
THAT EXPORT PROGRAMS ARE AN INVESTMENT IN THE FUTURE OF THE US,
AND THEY CREATE JOBS AT HOME FURTHER, AMERICA'S ECONOMIC VITALITY
DEPENDS HEAVILY ON EXPORTS, AND THE ABILITY TO CREATE EXPORTS WILL
DEPEND, IN LARGE MEASURE, ON SMALL BUSINESSES. SINCE 1989, EXPORTS
HAVE ACCOUNTED FOR APPROXIMATELY 70% OF THE GROWTH IN THE U.S.
ECONOMY. TO THAT END, WE SHOULD THOROUGHLY DISCUSS ANY PROPOSAL
TO HARMONIZE THE EXPORT WORKING CAPITAL PROGRAM (EWCP) OF THE
SMALL BUSINESS ADMINISTRATION (SBA) AND THE EXPORT-IMPORT BANK (EM-
IMBANK).
23
NOTWITHSTANDING, I UNDERSTAND COMPLETELY THAT OUR GOVERNMENT IS
FACING TOUGH BUDGET TIMES. THEREFORE, IT IS ESSENTIAL THAT WE, AS
LEGISLATORS, CLEARLY DEFINE OUR EXPORT GOALS AND ALLOW THE FEDERAL
AGENCIES CHARGED WITH CARRYING OUT THESE RESPONSIBILITIES TO DO SO
WITHOUT CONGRESSIONAL INTERFERENCE HOWEVER, WE MUST ENSURE
ACCOUNTABILITY AND FISCAL RESPONSIBILITY.
I WILL PAY CLOSE ATTENTION TO HOW EFFECTIVE THE PARTNERSHIP
BETWEEN THE EXPORT- IMPORT BANK (EX- IM) AND THE SMALL BUSINESS
ADMINISTRATION (SBA) EXPORT WORKING CAPITAL PROGRAM (EWCP) HAS
BEEN SPECIFICALLY, THE IMPLICATIONS OF THE HARMONIZATION OF EXPORT
FINANCING PROGRAMS BETWEEN THESE TWO AGENCIES. AGAIN, I WOULD LIKE
TO THANK CHAIRMAN TORKBLDSEN AND MANZULLO FOR HOLDING THIS
IMPORTANT HEARING
24
REP. JOHN J. LaFALCE
Ranking Democratic Member
Opening Statement
Oversight Hearing on the SBA Export Working Capital Program
September 7, 1995
This morning's hearing to examine SBA's Export Working
Capital Program is in part a consequence of an amendment I
submitted during markup of H.R. 2150 in August. My amendment would
maintain the Export Working Capital Program guarantee at its
current level of 90 percent of the loan amount. H.R. 2150
provides for 75/80 percent guarantees for all 7(A) programs. SBA's
Export Working Capital Program is a special sub-set of the SBA 7(A)
program. Guarantees in the Working Capital Program for FY-1995 to
date are less than 1 percent of the overall 7 (A) program.
I eventually withdrew that amendment with the understanding
that, if a consensus emerged as the result of this hearing, an
amendment to that effect could be offered during floor
consideration. I continue to believe my amendment merits support.
In September 1993, the Administration's Trade Promotion
Coordinating Committee issued its first report- -mandated by
Congress- -Toward a National Export Strategy. One of the
Committee's 65 recommendations focused on SBA's and Eximbank's
working capital loan guarantees. The report's recommendation was
to "streamline the pre-export working capital guarantee programs of
Eximbank and SBA to make the programs more customer- focused and to
25
OPENING STATEMENT OF THE HONORABLE DONALD A. MANZULLO
BEFORE THE SUBCOMMITTESS ON GOVERNMENT PROGRAMS AND
PROCUREMENT, EXPORTS, AND BUSINESS OPPORTUNITIES
OF THE HOUSE SMALL BUSINESS COMMITTEE
OVERSIGHT HEARING ON THE EXPORT WORKING CAPITAL PROGRAM
SEPTEMBER 7, 1995 10:00am
We are here today to review the effectiveness of the Export
Working Capital Program, jointly administered by the Small
Business Administration and the Export-Import Bank.
This is a relatively new program, not even a year old, that
tries to address one of the two major gaps in exporting -- trade
finance. The Export-Import Bank was known until recent years as
the export financing arm for big business. Small business has
few choices open to them, especially as many private banks shied
away from approving or even exploring trade loans in the wake of
the debt crisis in the developing world during the early 1980's.
26
This committee was the impetus behind requiring a ten
percent set-aside for small business loans at Ex-Im. But that
only scratched the surface. The Trade Promotion Coordinating
Committee recommended the current trade finance partnership
between SBA and Ex-Im. Because of the difference in the two
guarantee rates at Ex-Im and SBA, they agreed and Congress
approved the 90 percent guarantee level for the Export Working
Capital Program.
When we were in this room last month, the committee approved
HR 2150 that would decrease the guarantee rate for 7(a) loans to
80 percent for loans up to $100,000 and 75 percent for loans
above $100,000. The problem confronting this committee is that
this change would apply only to the SBA portion of the Export
Working Capital Program.
Today's hearing will explore the ramifications of this
proposal on this nascent program and whether or not it would be
wise to proceed with an amendment to correct this problem.
I look forward to the testimony of the witnesses here before
us today.
27
OPENING STATEMENT
CHAIRMAN PETER G. TORKILDSEN
SUBCOMMITTEE ON GOVERNMENT PROGRAMS
HOUSE COMMITTEE ON SMALL BUSINESS
SEPTEMBER 1. 1995
10:00 AM
The committee will come to order.
On August 4th the Small Business Committee marked-up MR
2150, the Small Business Credit Efficiency Act of 1995, with
the intent of decreasing the subisdy rate for the Small
Business Administration's (SBA) 7(a) loan program. The
legislation lowers the guarantee rate to 80% for all loans
below $100,000 and to 75% for all loans above $100,000.
During the mark-up, the full committee ranking minority
member, John LaFalce, offered but graciously withdrew an
amendment allowing the SBA to provide a 90% guarantee for
a revolving line of credit for export purposes with a maximum
of three years for repayment, regardless of the loan amount.
This is a joint hearing of the Small Business Subcommittees
on Government Programs and Procurement, Exports and
Business Opportunities. The purpose of todays hearing is to
examine the SBA's partnership with the Export-Import (Ex-lm)
Bank through the Export Working Capital Program (EWCP). It
28
is this panel's Intention to explore the implications of Mr.
LaFalce's proposed amendment, especially as compared with
loan guarantee rates provided by Ex-lm Bank, and to review
the progress of the harmonization of export financing
programs between the two agencies.
The Export Working Capital Program is a product of the 1993
Trade Promotion Coordinating Committee (TPCC)
recommendations regarding export financing. On October 1,
1994 the Ex-lm Bank and the SBA harmonized their respective
pre-export working capital programs. An agreement was
made which allows the SBA to process loans under the
amount of $750,000 and the Ex-lm Bank to process loans
above that amount.
There are a number of arguments both for and against
retaining the 90% guarantee rate for export purposes. It is
my hope that through testimony from and discussion with our
distinguished witnesses that we will address these issues and
make a solid recommendation to the full committee as to how
to proceed.
With that I will yield to my friend and colleague. Chairman
Manzullo for any opening statement he may wish to make.
29
PREPARED STATEMENT
OF
William C. Cummins
Group Vice President
SouthTrust Bank of Alabama, N.A.
On Behalf of the
Bankers' Association for Foreign Trade
Before the Subcommittees on:
Government Programs
and
Procurement, Exports and Business Opportunities
of the
Committee on Small Business
U.S. House of Representatives
Washington, D.C.
September?, 1995
93-907 96-2
30
Mr. Chairman and members of the Subcommittees, my name is William
Cummins, and I am Group Vice President of the SouthTnjst Bank of Alabama in
Birmingham, Alabama. I am pleased to appear today on behalf of the Bankers'
Association for Foreign Trade ("BAFT'), where I serve as Chairman of the Small
Business Export Finance Committee.
BAFT is one of the oldest U.S. financial trade associations, whose members
include virtually all U.S. banks that are actively engaged in international activities,
especially the financing of U.S. trade. BAFTs Small Business Export Finance
Committee consists of banks who are particularly involved in financing small business
exports throughout the country, and therefore utilize the U.S. Working Capital
Guarantee Program(WCGP), administered by the Export-Import Bank and the Small
Business Administration.
Small businesses, which employ about half of the U.S. private workforce and
account for about half of ail domestic sales, represent one of the fastest growing
segments of the U.S. export economy. By the end of 1993, small businesses were
generating merchandise exports of about $134 billion — 84 percent greater than 1987
levels.
For many years our industry has worked with both the Small Business
Administration (SBA) and the Export-Import Bank to design effective programs aimed at
assisting small business exporters and the banks which finance their transactions.
Financing small business exports is a rapidly expanding area of banking; there is,
however, the major challenge of how to effectively assess and monitor risk, while
maintaining adequate profitability.
The SBA and the Export-Import Bank provide the two primary Federal programs
which foster small business export finance through guarantees. Until 1994 these
programs were significantly distinct in structure and were largely underutilized by the
industry. Many banks opted out of small business export finance opportunities due to
the lack of an adequate entry-level program. However, in 1 994, both agencies came
forward with unified, cohesive and workable programs, and the result has been that
usage by banks under both programs has materially increased.
Unfortunately, the Small Business Enhancement Act of 1995 (HR. 2150, S. 895)
contains a provision which we believe will be a step backward in the progress that has
been made thus far, by creating a significant disparity between the two programs.
Specifically, the provision will roll back the maximum available SBA guaranty from the
current 90% coverage to 75% for guarantees in excess of $100,000 and 80% for
guarantees under that amount. This reduction in what is a very important protection to
31
small business lenders raises serious concerns about the future involvement by banks
in this area of trade finance and reduces the amount of exports which could be
supported. They are discussed below.
BAFT'S Small Business Export Finance Committee urges that these concerns be
carefully considered before the pending legislation is enacted, and that the SBA
guaranty provision be maintained at the current 90% level.
Key Points of Consideration of the Proposed Export Guaranty Reduction:
1. Historical Perception of Program Instability: For several years leading up to the
harmonized SBA/Export-lmport Bank program in 1 994, there was ongoing "tinkering"
with both programs resulting in an image of unstable and confusing programs. There
was the perceived risk that once a bank and an exporter entered either one of the
programs, there was the distinct risk that the program could be changed in "mid stream"
(keeping in mind that although these guaranties are often issued as a one year
commitment supporting a revolving credit line, the underlying relationships are, in fact,
for many years). The assumption is that if the exporter performs satisfactorily, the line
and supporting guaranty will be renewed each year. So, to change the program yet
again could serve to rekindle the negative views of the program's reliability.
Any undermining of the program's credibility and confidence in both the banking
and exporting communities is a very significant concern held by the Small Business
Export Finance Committee. Through the combined programs introduced in the fall of
1994, banks are now showing renewed and expanded interest in these useful programs
and, in the committee's opinion, no major or substantive changes should be
forthcoming in the near future (outside of ongoing administrative changes with the
Export-Import Bank program). Time is needed to let this harmonized program "lake
hold."
2. Inadvertent Competitive Advantage to Banks having Delegated Authority from
the Export-Import Bank: With the reduction of the SBA program's guaranty to 75%
and %80 respectively, banks which enjoy delegated authority under the Export-Import
Bank program (and therefore permitted to extended loans within the same boundaries
as the SBA program) will enjoy an immediate competitive advantage in the market as
the Export-Import Bank program bears a guaranty at the rate of 90%. This disparity will
yield an undue edge for those banks which can qualify for this optional feature and a
disincentive for banks to enter this field. Moreover, this disparity will discriminate
against companies seeking guarantees for less than $750,000; under the
harmonization program they are precluded from using the Export-Import Bank WCGP
program.
32
3. Need to Maintain Higher Guaranty Percentage: It has only been in recent years
where the market has seen an increase in the numbers of small businesses which
routinely sell internationally. With the lowering of the export threshold (including better
foreign market accessibility, more effective international communications, a competitive
dollar . . . ), more small and medium-sized companies are exporting, the availability of
trade finance lending services must be continually expanded to meet this growing
demand in so many geographic areas of the country. Simply stated financing
constraints causes lost exports.
Done correctly, small business export finance requires a hybrid blend of finance
expertise combining the technical knowledge of cross-border payments and credit risks
of selling overseas with the seasoned credit skills of asset-based commercial lending.
In the U.S., this banking field is still underdeveloped in many markets. However,
programs such as the U.S. WCGP provide the inducement/enhancement needed for
banks too more actively pursue this important, but niche, market - in the long run an
important part in developing a broad base of sustained exports from the small business
sector. Moreover, many transactions now done by participating banks would not be at
75 or 80%; they would be too costly and their risk could not be managed effectively
because of the low volume and lack of a securitization facility. ,
Thank you for your interest in the views of our Committee, which we hope will be
given full consideration with respect to this provision of the legislation. I would pleased
to answer any questions you may have in this regard or to provide additional
information.
33
United States General Accounting Office
(^ A(^ Testimony
Before the Subcommittee on Procurement, Exports, and
Business Opportunities and the Subcommittee on Government
Programs, Committee on Small Business,
House of Representatives
^^^^^^^^^ EXPORT FINANCE
10:00 am. EDT
Thursday.
Seplember 7, 1995
The Small Business
Administration's Role in
Meeting Small Business Needs
Statement of JayEtta Z. Hecker, Director
International Trade, Finance, and Competitiveness Issues
General Government Division
GAO/T-GGD-95.23S
34
EXPORT FINANCE: THE SMALL BUSINESS ADMINISTRATION'S
ROLE IN MEETING SMALL BUSINESS NEEDS
SUMMARY OF STATEMENT BY JAYETTA Z. HECKER, DIRECTOR
INTERNATIONAL TRADE, FINANCE, AND COMPETITIVENESS ISSUES
GENERAL GOVERNMENT DIVISION
The Small Business Administration (SBA) will be challenged to try
to continue to meet export finance needs of small- and medium-sized
businesses while adjusting to the lower federal funding levels
currently being projected for the coming fiscal year. GAO's
testimony focuses on SBA's Export Working Capital Program (EWCP),
discussing the past use of the program, key improvements made since
1993, projected current use of the program, and options to help
reduce the potential impact of reduced federal funding.
In response to the needs of U.S. exporters for working capital
loans that commercial lenders were unwilling to supply without
federal guarantees, SBA, with congressional support, developed the
Export Revolving Line of Credit program (now known as EWCP) in
1980. However, the program was little used until 1990, according
to a 1992 GAO report. A total of 161 loan guarantees, worth about
$45 million, were approved between fiscal years 1983 and 1990. In
fiscal years 1991 through 1994, the annual number and value of
working capital loans that SBA guaranteed remained stable,
averaging 80 loans worth about $28 million per year.
Responding to legislation in October 1992 regarding the
fragmentation of federal export promotion efforts and to
recommendations made by the interagency Trade Promotion and
Coordinating Committee (TPCC) that was established by that
legislation, SBA made changes to its EWCP. SBA addressed three
particular TPCC recommendations: (1) SBA has worked with the U.S.
Export-Import Bank (Eximbank) to streamline and standardize its
working capital programs; (2) SBA has supported "one-stop shops,"
or U.S. Export Assistance Centers, by assigning 11 staff to the
four pilot centers that are to provide a single point of contact
for potential U.S. exporters; and (3) SBA has established
cofinancing agreements with a few states, which have given the
states added ability to grant more loan guarantees.
GAO projects that because of SBA's efforts, it is likely that SBA
will guarantee about 164 working capital loans, totaling almost $55
million, for fiscal year 1995. SBA expects an even greater use of
the program than GAO estimates.
Because Congress is assessing the need for continued funding of
federal loan guarantee programs, GAO identified four possible
approaches to help reduce the potential adverse impact of decreas-
ing the funds available for EWCP. These options included (1)
lowering the guarantee coverage, (2) Increasing guarantee fees, (3)
leveraging resources by using its funding as an incentive to create
new state export financing opportunities, and (4) consolidating
SBA's EWCP into the Eximbank 's Working Capital Guarantee program.
35
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss the Small Business
Administration (SBA) and its efforts to meet the export finance
needs of smaller businesses while adjusting its operations to the
possibility of reduced federal funding levels.
My testimony will address exporter and Trade Promotion and
Coordinating Committee (TPCC)^ concerns regarding the limited
extent of export financing available to small- and medium-sized
businesses and how SBA has responded to this issue. It will focus
on SBA's Export Working Capital Program^ (formerly known as the
Export Revolving Line of Credit program) , highlighting the past use
of the program, key improvements made to the program, projected
current use of the program, and options to help minimize the
negative impact on the program's goal of expanding exports caused
by a reduction in the credit subsidy appropriation.
My remarks today are based on our reports issued in the past few
years covering various aspects of SBA's export promotion and export
finance progreuns. They also draw upon observations made during an
ongoing assignment that focuses on implementing the TPCC concept of
^TPCC is an interagency group responsible for developing and
coordinating U.S. export promotion programs.
^SBA's Export Working Capital Program (EWCP) seeks to expand U.S.
exports by encouraging lenders to make working capital loans to
U.S. companies for export-related production and marketing
activities. Exporters must be domiciled in the United States,
although businesses owned by foreign nationals or foreign entities
may be eligible for the program.
36
one-stop shops, or U.S. Export Assistance Centers (USEAC).
LIMITED EXPORT FINANCING
Following a debt crisis in developing countries during the early
1980s, U.S. banks sought to reduce their international debt by
limiting their participation in the trade finance area. The TPCC
Working Group on Trade Finance observed in a 1991 study that the
availability of private trade finance fell well short of demand.
According to a 1993 TPCC report,^ U.S. exporters maintained that
one of the greatest obstacles to increased U.S. exports is
inadequate working capital financing to support a company's desire
to begin exporting. It also noted that small-, medium-sized, and
inexperienced exporters tended to rely on banks for external debt
financing to a greater extent than large businesses. The TPCC
report states that commercial lenders generally were unwilling to
offer export finance services of the type that was most frequently
sought by these exporters: pre-export, transaction-oriented
financing (i.e., export working capital loans) for relatively small
amounts. Lenders viewed this type of financing as too risky, labor
intensive, and less profitable than other financial services.
^Toward a National Export Strategy. Trade Promotion Coordinating
Committee (Washington, D.C.: Sept. 30, 1993).
37
To persuade lenders to provide working capital loans to small- and
medium-sized exporters, SBA, the U.S. Export-Import Bank
(Eximbank), and various states have developed working capital
guarantee programs . SBA developed its program pursuant to the
Small Business Export Expansion Act of 1980 (P.L. 96-481, Oct. 21,
1980) to provide repayment guarantees to eligible lenders for
secured loans that would not be made commercially without SBA's
guarantee.
EWCP falls within the statutory authority of SBA's regular business
loan program, known as the 7(a) program.* There is no statutory
limit on the proportion of 7(a) guarantees that may be EWCP
guarantees. During fiscal year 1995 (through August 25, 1995),
EWCP loans represented less than 1 percent of SBA's total 7(a) loan
guarantee approvals.
LIMITED PAST USE OF SBA'S EWCP
As we reported in September 1992,^ historically, SBA's working
capital program has been little utilized. Since 1980, when the
program was first introduced, until 1990, there was little use of
*Thl8 program is named after section 207(a) of the Small Business
Act of 1953 (P.L. 163, July 30, 1953), which authorized it. Under
the 7(a) program, SBA is to provide direct loans, or guarantee
private lender loans to new or ongoing small businesses that have
been unable to obtain other financing.
^See Export Promotion; Problems in the Small Business
Administration's Programs (GAO/GGD-92-77, Sept. 2, 1992).
38
the program. Between fiscal years 1983 and 1990, SBA's export
finance program approved 161 loan guarantees, which covered about
$45 million in loans. We also reported that the principal reasons
for this low level of use included (1) insufficient training of the
SEA loan officers in the techniques of applying the program, (2)
inadequate marketing of the program to banks and the small business
community, and (3) little interest in the program on the part of
lenders due to the small average size of the loans and associated
small profits likely to be realized.
In our 1992 report, we noted that SBA had recognized these and
other program deficiencies and had made efforts to revise key
features of the program. For example, SBA extended the maximum
term of the loan guarantees from 18 months to 3 years. It also
rewrote the guide that SBA staff, participating lenders, and small
business exporters use for program applications. In fiscal year
1991 alone, SBA approved about $26 million in guarantees under the
working capital program, more than one-half as much as had been
approved during the previous 8 years of the program's existence.
At the time, we reported that this heightened program activity
reflected SBA's program improvements and that it suggested that a
substantial unmet demand for the program had existed before the
progreun revisions.
During an ongoing review, we have observed that the level of export
working capital guarantees remained stable from fiscal year 1991 to
39
fiscal year 1994. During this 4-year period, the annual number and
value of working capital loans that SBA guaranteed averaged 80
loans per year covering about $28 million in loans. The average
export working capital guarantee was about $350,000.
IMPROVEMENTS TO SBA'S EWCP
In October 1992, Congress passed legislation to address problems
related to a federal export promotion effort that was fragmented
among 10 agencies and lacked any governmentwide strategy or
priorities. Title II of the Export Enhancement Act of 1992 (P.L.
102-429, Oct. 21, 1992) created an interagency mechanism through
which the administration, working closely with Congress, might
rationalize and strengthen federal export promotion efforts. This
legislation codified the interagency TPCC and tasked it to issue a
report by September 1993 containing a "governmentwide strategic
plan for federal trade promotion efforts" and describing its
implementation.
In its 1993 report^ TPCC recommended, among other things, that the
federal government
"Toward a National Export Strategy.
40
streamline the pre-export working capital guarantee programs
of Eximbank and SBA to make the programs more customer focused
and to take advantage of the agencies' comparative strengths,
establish one-stop shops to provide local export communities a
single point of contact for all federal export promotion and
finance programs, and
encourage qualified state/local export finance entities to
enter into cofinancing arrangements in which risk is shared.
A high-level SBA official has stated that SBA fully supported the
goals of the TPCC report, noting that the agency could play a vital
role in achieving the TPCC goals, particularly as they related to
small business. To this end, SBA has made diverse efforts to
revitalize its EWCP and to increase the level of export financing
that it supports.
In our ongoing work, we have discussed with SBA officials their
efforts to revitalize EWCP. SBA has implemented many internal
changes aimed at improving the EWCP's ability to facilitate more
working capital loans. SBA issued comprehensive operating
guidelines for administering EWCP, provided basic export finance
training to almost 300 of its staff and resource partners (e.g..
Small Business Development Center staff) developed more In-depth
41
training on transaction lending^ for Its trade finance specialists,
and established specific EWCP goals for each of Its 68 district
offices.
In addition, SBA has made efforts to actively respond to each of
the three TPCC recommendations previously noted.
SBA Has Made Efforts to Harmonize with Exlmbank
The Exlmbank and SBA have been working together to streamline and
harmonize their working capital programs. Accordingly, they have
standardized many features of their programs,^ including the
application form, the initial application fee, the guarantee
coverage, and the types of transactions covered.
Exporters may now use the same form when applying for either an
Exlmbank or SBA working capital loan. Although the size of the
guarantee fees they charge vary, the initial application fee for
either an Exlmbank or an SBA guarantee is to be $100. To
standardize guarantee coverage, the Exlmbank reduced its coverage
from 100 percent of principal and interest to 90 percent, and SBA
raised its 85-percent guarantee to 90 percent. Funds guaranteed
^Transaction lending means financing to support specific
transactions that, in most cases, are self -liquidating, as compared
to SBA's more traditional asset-based financing in which SBA may
provide loan guarantees to purchase equipment. That equipment is,
in turn, used as collateral for the guaranteed loan.
^Effective October 1994.
42
under either agency's program may be used to support single
transactions or multiple export transactions. Similarly, they may
be used to acquire inventory and pay for direct manufacturing
costs, or to purchase goods and services.
By agreement, SBA is generally to assist small companies that need
a loan of $833,333 or less (resulting in an SBA guarantee of
$750,000 or less), and the Eximbank is generally to serve companies
that have credit needs above that amount.
SBA Has Supported One-stop Shops
In 1993, TPCC recommended the creation of four pilot USEACs. These
one-stop shops were designed to test the feasibility and
effectiveness of providing a single point of contact for the
fragmented federal export promotion and financing program.
Specifically, TPCC intended for USEACs to more effectively
integrate the trade network of the Department of Commerce, the
export finance expertise and resources of the Eximbank, and the
small business contacts and local presence of SBA into a seamless
one-stop shop for export-ready firms.
Viewing the USEAC network as a key component for delivering and
administering EWCP, SBA has taken an active role to support the
centers. It assigned 11 staff to the four pilot USEACs and assumed
the lead as site coordinator of the Long Beach, California, USEAC.
43
While SBA officials noted that the implementation of the USEAC
pilot was in some ways flawed (e.g., lacking unified goals), they
viewed the centers as the best means of administering EWCP. As
such, when TPCC later announced the planned openings of an
additional 11 USEACs by the end of 1995,^ SBA established 11 new
trade finance specialist positions to staff them.
Trade finance specialists assigned to USEACs are expected to spend
100 percent of their time administering and promoting SBA's working
capital program. They are to guide borrowers in the EWCP
application process and provide review and first approval^'' of the
working capital guarantees . They are also to spend a portion of
their time networking with and recruiting local banks to
participate in SBA's Preferred Lender Program. ^^ To ensure that
they are properly motivated, SBA has established EWCP goals for
trade finance specialists it has assigned to each of the centers.
For example, SBA staff located at the Long Beach USEAC have a goal
of completing 22 working capital guarantees for the current fiscal
year.
^As of August 1995, 5 of the additionally planned 11 USEACs had
been opened.
^^SBA requires that all loans be reviewed and approved by two
different loan specialists. With the exception of the Long Beach
USEAC, which has ability to complete both financial reviews In-
house, USEACs are to send their EWCP loan packages to an SBA
district office for the second approval.
^^Under the Preferred Lender Program, a lender and SBA enter Into
an agreement that allows the lender to approve loans and receive a
guarantee from SBA without obtaining prior SBA approval.
44
SBA Has Established Cofinancino Agreements
Recognizing that states such as California have specialized
experience in export lending, SBA entered into a coguarantee
agreement with the California Export Finance Office (CEFO) in
January 1994. This interagency agreement provided a 50/50 matching
guarantee for 90 percent of the principal of requested working
capital loans . Guarantees under this agreement were not to exceed
$1.5 million, ^^ or up to $750,000 per agency per guarantee.
According to the Director of CEFO, the state conducts its loan
analyses and completes its forms as usual, then sends the loan
guarantee package to SBA trade finance specialists located at the
Long Beach USEAC for approval. The loan package is also given to
an SBA district office attorney for legal review and approval.
Despite some duplication in the review process by SBA and CEFO, the
cofinancing arrangement represents an example of a cooperative
agreement that can be mutually beneficial. This arrangement allows
CEFO to benefit from having access to guarantee funds from SBA that
are in addition to CEFO's own funds. Also, CEFO may now be able to
support the larger transaction needs of small- and medium-sized
exporters. In the meantime, SBA may capitalize on CEFO's extensive
export finance expertise and reach out to a greater number of
small- and medium-sized exporters.
^^Loans under this agreement were not to exceed $1.67 million.
45
since January 1994, SBA and CEFO have coguaranteed 11 loans,
totaling $8.3 million. While on the surface the number of loans
appears low, both federal and state officials view the agreement as
a success. The Director of CEFO viewed the coguarantee agreement
as a success, noting the state's added ability to grant more
guarantees by tapping into federal resources. SBA officials also
considered the agency's coguarantee agreement with CEFO to be .i
success and stated that SBA has recently established similar
arrangements with Kansas and Florida. They also noted that SBA
planned to further expand the coguarantee program to include other
states that have expressed an interest in the program and have
developed an effective export finance program.
FISCAL YEAR 1995 PROJECTIONS
INDICATE EXPANDED PROGRAM USE
Although it is still premature to assess the full effects of the
Eximbank's and SBA's harmonization efforts as well as other
internal changes made by SBA, initial results indicate a greater
use of EWCP. An SBA official suggested that the agency will
guarantee about 240 loans by the end of the fiscal year--over three
times as many loans as those guaranteed during the prior fiscal
year. This estimate was calculated by adding the number of
preliminary commitments and the number of applications (i.e.,
pending approval, in process, or newly submitted) outstanding to
46
the actual number of approved guarantees.
However, our projection, based on a straight extrapolation of 11
months of actual data, estimates that SBA will guarantee about 164
working capital loans, totaling almost $55 million, for fiscal year
1995. Although this projection is lower than SBA's, it represents
a marked increase from the prior years, double the number of loans
guaranteed by SBA during fiscal year 1994.
While the volume of loans has increased during the past fiscal
year, we believe it is still too early to judge SBA's efforts to
restructure and improve EWCP as well as the overall effectiveness
of the program. Information on the extent of defaults that may be
associated with these loans is still limited. Also, an SBA
official pointed out that the agency's ability to fully implement
its EWCP delivery system was based on the implementation of the
USEAC network which, at the time, was still scheduled to open
another six centers before the end of the calendar year.
47
OPTIONS TO HELP REDUCE THE ADVERSE
IMPACT OF A DECREASED CREDIT SUBSIDY
In the current budget environment. Congress is carefully assessing
the need for continued funding for all federal programs, including
federal credit programs. The assessment of credit programs
includes various SBA-administered programs such as EWCP. We
understand that reducing the agency's overall credit subsidy
program for the 7(a) program is currently under consideration, and
I will discuss four suggested approaches we identified to help
reduce the potential adverse impact of lower federal funding on the
program's goal of increased exports: (1) lowering the guarantee
coverage, (2) increasing the fees charged, (3) better leveraging of
resources, and (4) consolidating SBA's EWCP into the Eximbank's
programs .
Lowering the guarantee coverage. The first approach involves
lowering SBA's guarantee coverage to about 70 to 75 percent to
help decrease the credit subsidy cost of any given loan
receiving an SBA guarantee. This approach would permit a
larger number of guarantees to be made than otherwise would be
the case with the reduced appropriation, if lending banks are
willing to assume the additional risk and exporters are
willing to pay potentially higher rates. This approach may
work for SBA's overall 7(a) program for which a large number
of banks participate. However, this approach may have a
48
negative impact on SBA's EWCP, which does not have the benefit
of as extensive a pool of banks to finance export loans as is
available to its domestic programs. Reducing the guarantee
coverage would create greater risk for participating lending
institutions, thereby making these export finance loans less
attractive to them. This, in turn, could further diminish the
already limited pool of banks willing to engage in providing
export working capital loans to small companies. Thus, the
actual result of reducing the guarantee coverage could be a
decrease in the use of EWCP beyond what would happen from just
cutting the current subsidy appropriation.
Also, effective this fiscal year, SBA increased its guarantee
coverage for export working capital loans from 85 percent to 90
percent to be consistent with the Eximbank's level of coverage.
Decreasing the guarantee coverage would run counter to this
congressionally approved harmonization effort and to other efforts
designed to encourage greater private sector participation in
export financing.
Increasing the fees charged. Additional revenues realized
through increased fees lower the credit subsidy cost of making
loans. SBA guarantee fees have remained stable at 0.25
percent per year of the guaranteed amount^^ and consistent
^•'The SBA fee is 0.25 percent of the guaranteed amount for loans
that are 12 months or less. For loans that are guaranteed longer
than 12 months, the fee is 2 percent of the guaranteed amount.
49
with similar guarantees offered through its other programs.
This fee was not made directly consistent with the Eximbank as
part of the harmonization effort; under the Eximbank 's
Delegated Authority Program, ^^ the guarantee fee is 0.75
percent per annum of the loan amount for loans that do not
exceed $833,333 and mature in 6 months or less.^^
According to SBA officials, the agency has chosen to keep fees at
the current level to better service the small business community
and to help keep export financing accessible to them. They
acknowledged, however, that given the current budgetary
environment, it may be time to consider increasing the fees
charged. Keeping fees reasonable so as not to drive small
businesses away from exporting will continue to be an important SBA
consideration. One official suggested that standardizing fees with
state programs, such as CEFO, that focus on smaller businesses as
does SBA may be more appropriate. CEFO currently requires a 0.50
percent facility fee on the amount of the guarantee.
Better leveraging of resources. SBA has already started to
engage In leveraging strategies involving cooperative
^^Under the Eximbank 's Delegated Authority Program, a lender and
the Eximbank can enter into an agreement that allows the lender to
approve loans and receive a guarantee from the Eximbank without
having to submit individual applications to the Eximbank for
approval .
^^For loans that do not exceed $833,333 and mature in 7 to 12
months, the fee is 1.5 percent per annum of the loan amount.
50
agreements with state entities, such as CEFO, and with private
banks through its Preferred Lender Program. SBA may be able
to further leverage its resources by using its funding as an
incentive to create new state export financing initiatives or
to enhance existing ones.
SBA could be a catalyst for change if some of its funds are
provided as an incentive for states to increase their funding of
export finance programs and if states choose to take advantage of
such an incentive. In using SBA resources to provide matching
federal funds, limited federal funding can be used as an inducement
for states to assume a greater role in providing export finance
assistance to small businesses.
SBA could provide states that do not have export working capital
guarantee programs with matching funds to encourage them to
establish such programs. For states with existing programs, SBA
could match additional state dollars with federal dollars as long
as the states are willing to Increase their appropriation for
working capital guarantees. For exeunple, if a state currently
appropriates $10 million for export financing guarantees and
increases Its appropriation by an additional $5 million knowing
that SBA would match It with $5 million in federal funds, this
would result In $20 million In total available guarantees rather
than $15 million — $10 million from the state and $5 million from
SBA. In this way, additional state funds would be made available
51
to provide more export financing assistance to small businesses in
general and could help minimize the adverse impact of a reduced SBA
credit subsidy.
Consolidating SBA's EWCP into the Eximbank's programs. In
recommending that harmonization efforts be evaluated by the
two agencies 1 year after their effective date (October 1994),
it appears that TPCC may have recognized the potential
inefficiencies of continuing both SBA and Eximbank involvement
in providing export working capital assistance to small- and
medium-sized exporters. Specifically, TPCC suggested that if
harmonization efforts were deemed to be unsatisfactory, SBA's
working capital program should be consolidated into the
Eximbank's Working Capital Guarantee Program.
Despite this directive, TPCC has a limited basis for assessing the
effectiveness of either agency's program. As of July 1995,
criteria for making this assessment had not yet been developed,
and, in the absence of such criteria, it is not clear how this
assessment could be made. Among other considerations, such an
assessment might be based on the amount of use each program has
generated, the default rates encountered, the cost-effectiveness of
each program, and the efficiency of the programs. According to a
TPCC official, the SBA and Eximbank are currently developing the
evaluation criteria with an overall assessment projected to be
completed by December.
52
Consolidating the two programs may go further towards decreasing
the possibility of overlapping responsibilities or duplicating
operations than harmonization. It may also result in less
confusion on behalf of small- or medium-sized exporters, who would
only have to deal with one federal agency for export financing.
However, consolidating SBA's EWCP into the Eximbank's program would
also present other issues for consideration. These issues include
the extent to which banks participating in the Eximbank's
Delegated Authority Program would be willing to meet the
finance needs of smaller companies by providing export working
capital loans that may be less than $833,333 and
the amount of budgetary authority that would need to be
transferred, given the recent increase in use of SBA's EWCP.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to try to answer any questions you or the Subcommittee may
have.
53
STATEMENT OF
MARTIN A KAMARCK
VICE CHAIRMAN AND CHIEF OPERATING OFFICER
EXPORT-IMPORT BANK OF THE UNITED STATES
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT PROGRAMS AND
SUBCOMMITTEE ON PROCUREMENT, EXPORTS, AND
BUSINESS OPPORTUNITIES
COMMITTEE ON SMALL BUSINESS
US HOUSE OF REPRESENTATIVES
SEPTEMBER?, 1995
Mr. Chairmen, Members of the Subcommittees:
Thank you for the opportunity to appear before the Subcommittees to testify on the
Export-Import Bank's (Ex-Im Bank) partnership with the Small Business Administration (SBA)
for the working capital guarantee program I am very pleased and proud to bring the
Subcommittees up to date on the harmonized working capital guarantee program as well as on the
other improvements Ex-Im Bank has made to assist small business.
Before I discuss the harmonized program, I want to let the Subcommittees know that
FY'94 was a record year for small business support by Ex-Im Bank. We anticipate that we will
break our own record in FY'95. In FY'94, small business accounted for 12% of total dollar
volume, and amounted to $1 .7 billion of U.S. exports financed through Ex-Im Bank. Preliminary
figures for FY'95 show that small business accounts for 17% of Ex-Im Bank total dollar volume,
and amounts to over $2 billion in exports financed.
54
These results attest to the success of the changes Chairman Ken Brody, the Ex-Im Bank
Board of Directors and the staflFhave put in place in the Bank over the last two and a half years
I am proud to have been a part of the process. With this improved support, we have assisted
more small businesses to enter and compete in the global marketplace But, of course, much
more can still be done We are continuing to actively reach out to the exporting and banking
communities and are looking for more and better ways to assist our U.S. small business exporters
In fact, as an unprecedented policy decision, we have asked our Advisory Committee to focus on
small business as their only theme for 1995
I want to commend Maria Haley, the Ex-Im Bank Director designated with the specific
responsibility for small business activities of the Bank Ms Haley's leadership, persistence, and
commitment to small business play a vital role in the success of the Bank's efforts.
Over the past two and a half years, Ex-Im Bank has made small business a top priority.
We recognized that the needs of small business are very different from those of large ones. Our
goal was to provide a product for small business that was easy to access, easy to use and
competitive in the marketplace. We conducted a thorough review of Ex-Im Bank programs and
policies and made changes accordingly. We strengthened program support for small business in
all stages of the financing cycle At the same time, we sought out ways to increase access to the
Bank, and to increase the number of exporters and lenders.
The Ex-Im Bank-SB A harmonized program is one of the vehicles we developed to meet
55
one of the most pressing special needs of small business exporters: pre-export working capital.
The harmonized program makes it easier for an entrepreneur to get ready support for their
working capital needs right at home on Main Street. By joining Ex-Im Bank in providing pre-
export working capital, SB A adds value to the exporting capabilities of this important segment of
the US. economy — small business. We believe reducing the SB A export working capital
guarantee coverage below 90 percent may hurt small business and create confusion for small
businesses seeking Federal export guarantees. If lenders are not willing to take the additional risk
of the lowered guarantee, the real losers will be the small business exporters who truly need the
localized support and assistance of both the SB A and their lenders.
The USG Working Capital Guarantee Program
Small businesses face a special problem getting into exporting. Export sales expand their
markets and, ultimately, their revenues. To get there, however, they have to pay increased costs
for such things as workers, inventory and marketing to make those export sales. They need
working capital. Yet bankers do not like to lend against inventory, work in progress or export
trade receivables. The export working capital program bridges this gap. Prior to the
harmonization on October 1, 1994, the United States Government (USG) operated two similar
but separate working capital guarantee programs ~ one at Ex-Im Bank and the other at SBA.
Small business found the two programs were ineffective and confusing From inception of
the Ex-Im Bank program until 1992, pre-export working capital financing was available at 90
percent. Banks, however, demonstrated little interest in the program. Bankers complained that
56
the Ex-Im Bank guarantee was too conditional and would not take riskier deals In March, 1992,
then-Ex-Im Bank Chairman John Macomber raised the guarantee level to 100 percent in order to
attract more lenders into trade finance. Banks became more involved in the program. During this
same time, the SB A Export Revolving Line of Credit program (ERLOC) guaranteed 85 percent
of total loan amount
In 1 992, the Trade Promotion Coordinating Committee (TPCC) was given an explicit
mandate by Congress to coordinate activities and prevent unnecessary duplication in the Federal
export promotion and financing programs In its first Report to Congress dated September 30,
1993, the TPCC recommended that Ex-Im Bank and SB A streamline and harmonize their pre-
export working capital guarantee programs for a one year trial period The TPCC wanted to
make the programs more customer-focused and to take advantage of each agencies' comparative
strengths. The TPCC also wanted to improve small and medium-sized firm's access to working
capital and to encourage private sector financial firms to increase their level of participation in
financing exports The TPCC recommendation also required that the harmonized program be
evaluated one year after its effective date We are now in the final stages of hiring an independent
expert to perform the evaluation of the harmonized program. Once that expert gets started, the
evaluation should be completed within 60 days.
An important element of harmonization was to agree on a common percentage of
coverage for the guarantee. After consulting with bankers, we agreed on a 90 percent guarantee.
Ex-Im Bank came down fi"om 100 percent, and SB A came up fi^om 85 percent Throughout
57
FY'94, we worked with our colleagues from SBA to develop a streamlined, simplified USG
export working capital guarantee program In addition, we embarked on extensive cross-training
of staff, development of uniform applications aijd accompanying documentation, and for SBA,
legislative changes. In September and October, 1994, officials from Ex-Im Bank and SBA
conducted export finance seminars in thirteen cities to educate lenders on the improved programs.
Approximately 1,300 bankers attended the seminars.
Beginning on October 1, 1994, a single US. Government working capital guarantee
program was available to a much broader spectrum of lenders and exporters. Applicant's requests
are processed by SBA if the guaranteed loan amounts are $750,000 or less and are "SBA
qualified" businesses. All other requests are processed by Ex-Im Bank For Ex-Im Bank, the
Working Capital Guarantee Program (WCGP) is a separate, stand-alone program. For SBA, the
Export Working Capital Guarantee program (EWCGP) is a small subset of the 7(a) program.
The EWCGP represents less that 1 percent of the SBA 7(a) program. The remainder of the SBA
7(a) program is devoted exclusively to domestic financing.
Results of the Harmonized Program
Results of the harmonized program are impressive for both agencies. Since October 1,
1994, the harmonized program has been responsible for providing $328 miUion of loans to the
U.S. small business sector. InFY'95 to date, SBA has approved 156 transactions worth $52
million as compared to FY'94 when 77 transactions were approved worth S27.4 million. In FY'95
to date, Ex-Im Bank has approved 167 transactions worth $276 million, and we anticipate close
58
to $300 million by the end of FVQS In FY'94, Ex-Im approved 155 transactions worth $180 6
million. Thus, we anticipate increased use of the harmonized program in FY'95 will result in an
increase of 66 percent from FY'94 in the total dollar volume of working capital guarantees by
both agencies
In addition, fifty three lenders from twenty two states and the District of Columbia have
qualified and are acting as delegated authority lenders for Ex-Im Bank Qualified lenders can
conunit up to $2 million per borrower without case-by-case approval from Ex-Im Bank.
The Impact of Reducing the Guarantee at Ex-Im Bank
The Ex-Im Bank Board of Directors will be in a difficult position if the SBA working
capital guarantee is reduced below 90 percent. If the Ex-Im Bank Board seeks to comply with
the Congressional mandate and TPCC recommendation to coordinate activities and prevent
unnecessary duplication in the Federal export promotion and financing activities, the Ex-Im Bank
working capital guarantee would have to be available at the same rate as SBA — 75% for
transactions over $100,000 and 80% for transactions under $100,000. If the Ex-Im Bank Board
chooses to be responsive to the Bank's customers, especially based upon previous lending
experience, the Ex-Im Bank working capital guarantee would have to remain at 90%.
The Impact of Reducing the SBA Guarantee on Small Business and Banks
We believe exports by small business wall be disproportionally reduced if SB A's guarantee
is lowered to 80 percent for loans of up to $100,000 and 75 percent for loans above $100,000.
59
Reducing the level of cover will reduce the volume of exports because assets based on export
loans are particularly troublesome for many local and regional banks Small exporters typically
use their local or regional lenders to assist in securing their export working capital needs. Such
lenders are generally not knowledgeable of, nor wiUing to assume the risks, associated with the
underlying foreign accounts receivables.
Based on our discussions with lenders, we are concerned many small business export
working capital transactions will be denied by local and regional lenders because of the lower
guarantee coverage Many lenders have an aversion to taking foreign risk. Domestic risk is
easier to quantify for local and regional lenders. Moreover, domestic risk is perceived by these
lenders as less risky than export working capital. Requiring small and regional lenders to assume
more than 10 percent of the risk may reduce the funds these lenders are willing to provide to small
business exporters.
In addition, for lenders, the percentage of cover provided by the United States
Government is a key factor in determining the cost and profit margin of a transaction While
small business working capital requirements tend to be relatively small in dollar amount terms,
e.g., $25,000 - $500,000 , the amount of expenses/overhead devoted to a small transaction is the
same as it would be for a larger transaction, e.g., over $2 million. Lenders choose how to allocate
their resources based upon likely return of one transaction versus another. Unless the costs are
reasonable to assure that a minimum return is earned, the lender will almost always choose the
larger deal. Thus, as coverage is reduced, the lenders' requirements for return increases.
60
Reducing the cover to 75-80% is very likely to adversely affect a lender's willingness to provide
the necessary financing
In short, returning to the "two program mode" less than one year after the harmonized
program began will seriously undermine the seamless, efficient and harmonized USG program
which Congress and the Administration have worked hard to establish Furthermore, any
reduction in the percent of coverage offered by SB A will render the SBA program less attractive
from a lender's perspective and will bias small business users toward using the Ex-Im Bank
program ~ or to not financing smaller transactions However, with only five regional offices, Ex-
Im Bank does not, and will not, have SBA's capacity to meet the pre-export working capital needs
of small business exporters.
Conclusion
Ex-Im Bank and SBA have come a long way during the last two and a half years to make
pre-export finance market competitive, easy to access and user friendly for small business. If
SBA offers a 75 or 80 percent working capital guarantee for export transactions, we will be
revisiting the problems we sought to solve several years ago. Mr. Chairmen, I welcome the
opportunity to discuss this matter wdth you and the members of the Subcommittees, and, I am
happy to answer any questions.
61
EXtImEmk
Jobs ruRoi gh Exports
Reinventing Ex-Im Bank
FACT SHEET
WORKING CAPITAL GUARANTEE PROGRAM
BACKGROUND
Ex-Im Bank's Working Capital Guarantee Program encourages lenders to make
shon-term loans to U.S. businesses for various pre-expon related aaivities. The program
facilitates the expansion of U.S. exports that otherwise would not occur. It helps small and
medium-sized businesses that have exporting potential but need working capital funds to
produce or market goods or services for export. Ex-Im Bank will consider applications
from exporters direaly or from lenders where the lender certifies that the loan would not
be made without Ex-Im Bank's guarantee and Ex-Im Bank determines that the exporter is
creditworthy and has an ability to perform. The exporter may use the guaranteed
financing to purchase finished produas, or materials or labor to produce goods or services
for export; to cover stand-by letters of credit, and bid or performance bonds; or fund
certain marketing aaivities when sufficient collateral and cash flow exist.
RErNVErsTTING EX-IM BANK IMPROVEMENTS
In order to increase utilization of the program and Ex-Im Bank's suppon of small
business, we are making several substantive changes. The two keys to increased support are
an expansion of the authority of lenders to commit working capital guarantee loans
without Ex-Im Bank's credit review (delegated authority) and improvements to the
guarantee that Ex-Im Bank exiends to lenders.
• Increased external delegated authority under a two-tiered system effective Oaober 1,
1994: (i) "A" level lenders will have $2 million (Ex-Im Bank liability) in delegated
authority per borrower on a cumulative basis; and (ii) "B" level lenders will have $1
million (Ex-Im Bank liability) in delegated authority per borrower on a cumulative basis.
• Institutional caps on lenders with delegated authority: (i) "A" level lenders will have an
institutional cap of $25 million (Ex-Im Bank liability); and (ii) "B" level lenders will have
an institutional cap of $10 million.
•
Reduction in coverage to 90% of principal and interest for all transactions effective
Oaober 1, 1994 to mitigate the risk associated with increased levels of delegated
authority and to harmonize Ex-Im Bank's program with the Small Business
Administration's program.
93-907 96 -a
62
• Two incentives for lenders to use delegated authority effeaive Oaober 1, 1994: (i) allow
lenders to collateralize separately their 10% risk retention for all delegated authority
transaaions; and (ii) allow lenders to retain 100% of the 1.5% facility fee for delegated
authority transaaions over $750,000 of Ex-Im Bank liability. For delegated authority
transaaions under $750,000 of Ex-Im Bank liability, the lender will be allowed to retain
1.25% of the 1.5% facility fee and remit .25% to Ex-Im Bank.
• Increased transaaional amount under the Priority Lender Program to $5 million. Ex-Im
Bank provides a turnaround time of 10 working days for applications submitted by
priority leaders.
• Revised the guarantee agreement with a minimally conditional "master" guarantee and a
separate borrower agreement.
• Increased internal delegated authority to the vice president and deputy vice president of
the U.S. Division to $5 million.
• Changes affeaing collateralization requirements for all transactions: (i) clarified that
disbursements of up to 100% against the value of inventor}' purchased pursuant to the
borrower's export contraa are possible; (ii) reduced the collateral value required for bid
or performance bonds, or stand-by letters of credit to 50% of the amount of such bond
or stand-by letters of credit; and (iii) for transaaions under $1 million in lieu of semi-
annual collateral inspeaions, permit the lender to rely exclusively on standardized
monthly borrowing certificates executed by the borrower.
• The Private Export Funding Corporation has agreed to be a liquidity source for lenders
and to establish a "lender of last resort" program to fund preliminary commitments for
which exporters are unable to obtain financing from commercial sources.
Effeaive Date: Immediately.
For more information, contact Sam Z. Zvtcer, 2C2-566-882C.
63
U.S. Small Business Administration
r~2-i. l-J]!r Washington, D.C. 20416
TESTIMO>fY OF
SMALL BUSINESS ADMINISTRATION
CASSANDRA M. PULLEY
DEPUTY ADMINISTRATOR
before the
SUBCOMMITTEES ON GOVERNMENT PROGRAMS
AND
PROCUREMENT, EXPORTS, AND BUSINESS OPPORTUNITIES
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
HEARING ON
THE SMALL BUSINESS ADMINISTRATION/EXPORT-IMPORT BANK
EXPORT WORKING CAPITAL PROGRAM
September 7, 1995
64
Mr. Chairmen and Members of the Subcommittee, thank you for inviting me to testify
on harmonization of the Export Working Capital Program (EWCP) of the Small Business
Administration (SBA) and the Export-Import Bank (Ex-Im Bank).
Exports are making an increasingly important contribution to America's economic
growth. Since 1989, exports accounted for 70 percent of the growth in our economy.
Unfortunately, compared to our major competitors, the United States remains an export
under-achiever. One reason is simple ~ too few U.S. firms export. A 1987 Census Bureau
study found that SO firms accounted for 43 percent of all U.S. exports and that only 10
percent of U.S. firms export regularly. These figures suggest that there is great potential for
export growth among U.S. small businesses.
Earlier this year the House Small Business Committee heard from three former SBA
Administrators about their experiences at the Agency and their opinions about the success of
its programs. The former Administrators concluded the hearing by remarking that our
nation's ability to overcome trade deficits rests firmly with the success of small business
exporters and that SBA's international trade program can play an important role in that
success.
65
This Administration has worked hard to provide small businesses with the tools they
need to succeed in the international marketplace because it understands that small businesses
are vital to the health of the U.S. economy. Historically, one of the most significant
obstacles small business exporters face is a lack of financing. Study after study indicates that
small exporters in this country have a very difficult time obtaining trade finance.
Unfortunately, many banks perceive smaller trade loans to be too risky and time-consuming -
particularly transactions under $1 million. Yet, deals of this size are precisely the kind
exporters need help with the most.
Over 1,000 participants in the June 1995 White House Conference on Small Business,
recognizing the need for government-supported export fmancing, called on Congress and the
President to authorize SBA and Ex-Im Bank "to sponsor revitalized fund programs designed
to foster the financing of international trade, including the new Export Working Capital
Program."
Government-supported export finance assistance can have a significant economic
development impact. The Department of Commerce estimates that for every $1 million of
exports, 20 new jobs are created. California's Export Finance Office estimates that for every
dollar of export finance assistance, there is a seven-fold return to the American economy.
While the statistics are revealing, even more telling is the impact exports have on the
employment and health of individual small businesses. Let me give you one example. CCA
66
Electronics of Atlanta, Georgia, manufactures radio broadcast transmitters. The company has
been in business for over 30 years and has grown to 45 employees. Although CCA exports
worldwide, the company encountered problems financing the production of large international
contracts. The company turned to the SBA and received a $400 thousand EWCP loan.
Exports now account for up to 60 percent of the company's sales. According to Ronald
Baker, president of CCA, "If we didn't have the SBA's EWCP, we would have been out of
business a long time ago. The EWCP is essential for small businesses. "
The objective of SBA's Export Working Capital Program is simple -- to increase small
businesses' access to capital by helping those who are capable of exporting but might not
qualify for conventional balance sheet fmancing. Modeled after Ex-Im Bank's and
California's successful export finance programs, the EWCP is transaction-based. That means
rather than focus on the exporter's balance sheet -- as would be the case with a regular 7(a)
business loan - the credit decision is based on the strength of each transaction. By focusing
on specific transactions, SBA can reach an important segment of the small business
community that may not have much to collateralize a loan (beyond the export inventory and
receivables), but who nonetheless are very capable of exporting successfully.
Even though SBA is helping small businesses that might not qualify for conventional
financing, we are doing so at little risk to the taxpayer. The experience of Ex-Im Bank and
California's program indicates that trade finance can be very low risk, with losses around one
or two percent. Although SBA's own experience under the new program is limited, there are
67
strong indications that losses will be minimal. Because EWCP loans have maturities of 12
months or less, a significant number already have matured and been repaid. So far this year,
SBA's program has had no defaults.
An important benefit to this transaction-based approach is its strategic business
development impact. By working with small businesses one deal at a time, SEA can help
them establish successful track records in exporting. With one or two successful transactions
under their belts, exporters are much more likely to be viewed as 'bankable" by conventional
lenders and, as their working capital needs increase, exporters can smoothly transition to the
higher dollar value programs of Ex-Im Bank.
Status of EWCP Pilot
Two years ago, the President's Trade Promotion Coordinating Committee (TPCC),
made up of the 19 federal agencies with export responsibilities, identified three essential
ingredients that small business exporters need to be successful ~ access to capital, trade leads,
and expertise. Tlie SBA has reshaped its international trade program to respond to each of
these needs. In so doing, the agency has been careful to ensure that the programs SBA
delivers do not duplicate the services provided by other agencies within the government, and
we have worked hard to assure that we strengthen our public/private partnerships to deliver
the best possible programs in the most cost effective way.
68
Last year the SB A, pursuant to Public Law 103-403, redesigned its export loan
guarantee program. That program, authorized as part of the 7(a) regular business loan
program, provides small businesses with the working capital necessary to support their export
transactions. On October 1, 1994, the SBA and Ex-Im Bank announced the new Export
Working Capital Program (EWCP), and began its operation on a pilot basis. The new
program, in conjunction other SBA loan programs available to exporters, makes it much
easier for many small firms to obtain the financing they need to export - be it working
capital, fixed asset financing or, as is often the case, a combination of the two.
The SBA's Export Working Capital Program:
• Is "harmonized" with Ex-Im Bank's working capital program to provide
seamless service for small businesses as their export financing needs increase.
• Offers a single, one-page application that lets the exporter apply either to the
SBA or Ex-Im Bank, depending on the amount requested. The SBA guarantees
amounts up to $750,000, Ex-Im Bank handles larger amounts.
• Offers a 90 percent guarantee and uniform lending policies, guides and
instructions, which simplifies the process for our lending partners.
• Provides speedy turnaround and faster service, usually three to 10 days,
through a nationwide network of district offices and SBA trade finance
specialists in each of the U.S. Export Assistance Centers.
• Makes available preliminary commitments (PCs) to exporters, where the SBA
reviews the loan application and offers its guarantee up front. This gives
69
lenders an assurance that SBA will back the loans if a lender agrees to the
terms and conditions set out in the preliminary commitment.
• Allows exporters to finance standby letters of credit.
To ensure the success of the Export Working Capital Program, SBA has given its field
offices aggressive goals for both the EWCP and other export-related loans. (The latter
includes all 7(a) loans to small business exporters. Although export-related loan proceeds
may be used for domestic purposes as well as exporting, the figure indicates the total number
of exporting firms supported by SBA's financial assistance.)
So far, the results are encouraging. SBA has approved 156 Export Working Capital
loans, worth nearly $52 million. This is more than double the number of EWCP loans
approved all of last year. In addition, the agency has approved 46 preliminary commitments,
many of which could convert to final commitments before the end of the fiscal year. SBA
has approved nearly 1 ,6(X) export-related loans so far this year. Our goal is for an increase
of nearly 50 percent over the record 1,161 loans made last year and more than 100 percent
over the record 757 loans just two years ago.
In addition:
• SBA is working with a number of state economic development and financing
agencies to establish cooperative agreements which will allow us to co-
guarantee state government backed export loans to small businesses. This will
70
help both federal and state governments leverage valuable and limited
resources. SBA currently has agreements with the states of California, Florida
and Kansas.
• The SBA has trained over 260 field staff nationwide on export fmancing, in
addition to approximately 30 of our resource partners. SBA also has added a
half-day Export Working Capital training component to the advanced credit
training course that all SBA loan officers must pass to attain the greatest loan
approval authority.
• In cooperation with Ex-Im Bank, the SBA participated in a series of one-day
seminars in 13 cities to explain our new programs to the nation's commercial
lenders. These were no-nonsense, information-packed sessions demonstrating
that the EWCP program can be profitable for the banks and their small
business clients. Approximately 1,300 attended, mostiy lenders.
• The SBA is working closely with the Small Business Committee of the
Banker's Association for Foreign Trade (BAFT) to get feedback on how the
program is working and to develop recommendations for improvement.
Clearly, the combined performance of the EWCP and Ex-Im Bank's export working
capital program show that we have dramatically increased the financial help available to this
country's exporters. While the Agency is moving in the right direction with these program
improvements, it is just a beginning. SBA will not be satisfied until it is just as easy for a
small business to get a loan to export as it is to get a loan for domestic business.
71
U.S. Export Assistance Center fUSEAC) Role in Export Finance
U.S. Export Assistance Centers, part of a TPCC initiative, are new "one stop" shops
for exporters. The SBA is a fully committed partner with the Department of Commerce and
Ex-Im Bank at the USEACs. The first four USEACs opened early last year in Miami,
Chicago, Baltimore, and Long Beach, California. Since that time, we have opened USEACs
in Seattle, Cleveland, Dallas, Denver and St. Louis. By the end of the calendar year,
USEAC offices will open in New York City, Philadelphia, Atlanta, Boston, Detroit and New
Orleans. As a result, small business owners can walk into a single location, get export
counseling and advice, apply for a loan, receive a preliminary commitment from the SBA and
then get help finding an appropriate lender for their transactions.
The services that the SBA provides at the USEACs are focused on financing for
export-ready firms (those that are exporting or have made the decision to begin exporting),
and providing information and education for new-to-export businesses (those that have not
previously considered exporting). With the creation of the USEACs, the SBA has developed
a cadre of trained export finance specialists located ground the country whose primary
mission is to provide export finance assistance.
In addition to the USEACs, the SBA is able to support small businesses through its
nationwide network of resource partners. Business counseling, technical assistance and
financial assistance for small business exporters are available through the SBA's extensive
72
network of district offices, a network of 7,000 commercial lenders, and the SBA's resource
partners such as the Service Corps of Retired Executives (SCORE) and Small Business
Development Centers (SBDCs). The scope of our resource partner network is unmatched
anywhere in the public sector. There are over 13,000 SCORE members and a network of
over 900 SBDCs to deliver the SBA's programs to the small business community.
Need for 90 Percent Guarantee
Although there is a significant increase in EWCP loan volume, relatively few lenders
make trade finance loans of under $1 million. While a typical SB A lender is willing to
finance smaller loans, it often has little or no international banking expertise. Without some
additional incentive, SBA lenders see little reason to take on the additional time, effort and
perceived risk that many believe accompany trade finance loans. SBA's USEAC staff have
spent considerable time informing local community and regional bankers about the
opportunities and benefits of offering export fmancing for their small business customers.
We are now starting to see results. In FY 94, SBA had 62 participating lenders in its Export
Revolving Line of Credit program. Thus far this year under the new program, 149 lenders
have signed participation agreements, an increase of over 140 percent.
Because banks perceive export transactions to entail greater risk, SBA and Ex-Im
Bank offer a 90 percent guarantee on their export working capital loans. This is consistent
with most state export finance programs, including California, Florida, Kansas and Maryland.
73
An enhanced guarantee is particularly important for SBA, because EWCP loans are short-
term and cannot be sold in the secondary market. Unless there are other incentives, this
makes them relatively less profitable than conventional 7(a) loans. To ensure that the
program is profitable for lenders, in addition to a 90 percent guarantee, SBA has adopted Ex-
Im Bank's practice of monitoring - but not regulating -- lenders' fees and interest rates. By
allowing lenders to establish their own fee policies, we have addressed one of the most often
cited reasons why lenders do not offer trade finance for small businesses -- lack of
profitability.
Of course SBA is concerned with the impact a 90 percent guarantee will have on the
agency's credit subsidy rate and our overall lending authority. However, the budgetary
impact of a 90 percent guarantee for EWCP loans is minimal. Because EWCP loans make up
less than one percent of the overall 7(a) portfolio, we estimate that the 7(a) subsidy rate for
FY 1996 would remain at its present level and that the weighted average guarantee percent
would be only marginally affected. That combined weighted average would be well within
the Office of Management and Budget's (0MB) recommended limit of 80 percent for the
SBA's business loan program.
Conclusion
Mr. Chairman, the SBA, Ex-Im Bank and our other TPCC partners are working
together to provide a comprehensive array of services to the exporting community. Through
93-907 96-4
74
the USEACs and the recently harmonized Export Working Capital Program, we are well on
the way to providing small businesses with the support they need to succeed in international
markets. Allowing SBA to continue offering a 90 percent guarantee for EWCP loans, which
Congress authorized only last year, will have an insignificant impact on the overall 7(a)
program subsidy rate, is consistent with the recommendations of the 1995 White House
Conference on Small Business and sends a strong signal of support to this nation's small
business exporters.
Thank you very much for the opportunity to testify today. I will be happy to answer
any questions you may have.
75
SBPs.
us. Small Business Administration
Oftice of International Trade
Information Summary
Export Working Capital Program
A New Program to Help You Bank Your Export Deals
The U.S. Small Business Admmistiation (SBA) is offenng a new program to provide the working capital
vou need to complete your expon sales. The Expon Working Capital Program (EWCP), which replaces SBA's
Export Revolving Line of Credit, now offers more flexible terms, low fees and a quick turnaround on the loan
decision — things you need to compete in today's fast-paced mtemational marketplace.
The Program The EWCP suppons expon financing to small busmesses when that financing is not otherwise ;ivailable on
reasonable terms. The program encourages lenders to offer export working capital loans by guaranteemg
repayment of up to 90 percent of a loan amount .■\ loan can support a single transaction or multiple sales on a
revolving basis.
The EWCP covers pre-shipraent working capital, post-shipment exposure or a combination of the two.
• Pre-shipment Loans can be used to: 1 ) finance the manufacmre of goods for export, or
2) purchase finished goods or services for export. The term of these loans is usually no more
than 1 2 months.
• Post-shipment Loans can be used to finance receivables resulting from export sales. The term
for these loans is generally six months or less
• Combination Loans can be used to finance both the acquisition or production of export goods and
services and the resulting accounts receivable. The inaximum term for these loans is 18 months, with
the post-shipment portion not to exceed six months.
EWCP loans also can be used to support stand-by letters of credit used as bid bonds, performance bonds or
payment guarantees to foreign buyers EWCP loans may not be used to estabhsh operatioas overseas, acquire
fixed assets or pay existmg debt.
kiterest rates are negotiable between the applicant and the lender SBA charges the lender a guarantee fee
of one-quaner of one percent (25 percent) for loans of 12 months or less. The guarantee fee for loans with
terms of greater than 1 2 momtas is 2 percent
Credit
Requirements
SBA considers several factors in reviewing an EWCP application:
• Is the transaction viable?
• How reliable is the repayment mechanism and source?
• Can the exporter perform under the terms of the deal?
Collateral EWCP loans are transaction based. The primary repayment source is the collateral associated with an indi-
vidual deal or a series of transactions.
Collateral may include export inventory, foreign receivables, and assignments of contract and letter of
credit pitjceeds. PerstHial guarantees usually are required to support the credit
76
Eligibility To be eligible for a guarantee under the EWCP. you must meet SBA's size standards. The standards var>'
by industry and are determined by either the number of employees or the volume of annual receipts. Check
with your local SBA distnct office lo determine if your company falls within the small business size standards.
You also must have been in business — not necessanly exponing — for at least 12 continuous months before
fding an application.
Service exports are eligible for EWCP financing but may require progress payments and additional collat-
eral. Businesses thai do not directly e.xport but can show that they manufacture or sell products or provide ser-
vices that are exported by others are eligible for EWCP financing.
How to Apply You can access the EWCP in one of two ways. If you are already working with a bank, you can request
that your lender apply for SBA's guarantee If you need help finding a lender to make an SBA-guaranteed
EWCP loan, you can apply to the SBA for a preliminary comrruiment (PC). The 60-day PC states that SBA
will provide the guarantee under the specified terms and conditions, and, with it, you can find an interested
bank-
The lender — - or the exporter if a PC is sought — should submit to SBA a completed EWCP application
(Form 4EX), along with:
Background
• Brief resum6 of pnncipals and key employees;
• History of the business and copy of business plan, if available;
Tran$action(s)
• Explanation of the use of proceeds and benefits of the loan guaranty, including details of the
underlying transaction(s) for which the loan is needed,
• Copy of the lettens) of credit and copy of buyer's purchase order or contract,
• Foreign credit insurance-related matenal (policy, application, buyer credit limit), if applicable;
• Copy of validated expon license, or copy of application for export license, if required;
Financial Information
• Business fmancial staiements (balance sheet and income statement) for the last three years,
if applicable;
• Interim financial statement(s) dated within 90 days of the date of the application filing;
• Aging of accounts receivable and accounts payable, as of balance sheet date;
• The most recent federal and slate income tax returns for the business;
• Schedule of aU prmcipal's/officer's/owner's compensation for the past three years and current year
to date;
• Personal financial statement(s) of the major shareholder(s)/parmer(s) of the company (owning over
20 percent) and their most recent federal income tax retum; and
• Monthly cash flow projections for the term of the loan, highlighting the proposed export transactioa
For more information about the EWCP, the SBA has offices located throughout the country. For the
one nearest you, consult the telephone direaory under "U.S. Government," or call the Small Business
Answer Desk at 1-800-8-ASK-SBA, (202) 205-7064 (fax). For the hearing impaired, the TDD number is
(202) 205-7333. SBA publications are available through SBA OnLine, SBA's computer-based electromc bul-
letin board. To access SBA OnLine call 1 -800-697-4636. You may also contaa a U.S. Export Assistance
Center Call the SBA Office of Intemauonal Trade (202) 205-6720 for the ninnber of the center nearest you
77
TRIPLE I CORPORATION
Dr. Juan J. Amodei
Chairman & CEO
September 21, 1995
Dear Mr. Chairman:
I am writing this Statement for the Record to bring to your attention my suggestions
and our Company's experience with export financing issues, and particularly the
SBA/Eximbank Export Working Capital Guarantee Program. As an experienced CEO with
a technology background, I am well aware of the many issues that affect the all important
balance of trade of the United States, and I believe that export financing is at the top of the
list of areas where the US Government can have a major impact in improving our
performance. The recently established SBA/Export Working Capital Guarantee Program
represents one of the most creative and effective initiatives that I have seen in this area.
It goes a long way towards implementing the many recommendations that have been made
in the past by the Associated Industries of Massachusetts and others to help in the exporting
of US products in a competitive world market. It does this by addressing a critical deficiency
of the private sector and leveling the playing field faced by small companies in the
international market.
In spite of the strides that have been made by our foreign competitors, innovation
in technology and new products is still the hallmark and major strength of the American
enterprise. Much of this progress is attributed to the smaller size companies, where agility,
motivation and dedication are less likely to be stifled by complex and unwieldy corporate
structures. It is in this area where our greatest opportunity to increase exports and stake
out our share of the markets of the future lies, but it is also here where the largest
obstacles, practical and bureaucratic, are found. As a nation, we have recently made
progress in easing the restrictions that discourage high technology exports to many regions
of the world where our foreign competitors were free to stake their claims, and we now have
an opportunity to continue and enhance a program that removes the major financial barrier
to export growth in the most fertile area of our economy, small and medium size enterprise.
Small businesses are the ones that lay the foundations for the major new markets of
the future, through innovative product development and agile and flexible market
development. Emerging companies, however, are saddled by constraints in their ability to
obtain working capital through standard means, such as bank borrowing, because of lack of
asset base and track record. This inability prevents them from rapidly introducing successful
One Lowell Research Center, 847 Rogers Street, Lowell, MA 01852 508-937-5400 508-453-0661 FAX
78
new products in the world market place, especially at a time in the companies' development
when this is critical to ensure rapid growth and a strong market position. The existing
Eximbank programs, while extremely effective and well thought-out, lack the broad
accessibility and rapid reaction time that often makes the difference between success and
failure in this area. The SBA/Eximbank Export Working Capital Guarantee Program is an
ideal extension of some of the more successful Eximbank initiatives, which can now benefit
a much broader spectrum of U.S. companies. It is a rapid reaction capability that enables
the small company to fill their orders on a transaction by transaction basis, ensuring fruition
where success has already been proven competitively by the winning of the order. In so doing,
this program will not only be able to make a major contribution to export, and therefore our
balance of payments, but it will also nurture the growth of the very industries that will
maintain our competitiveness of tomorrow.
Our Company, Triple I Corporation, located in Lowell, Massachusetts, and employing
20 people at present, designs and manufactures automated optical inspection systems for the
electronic industry. Early in 1995 we were faced with the need for capital to manufacture
and ship against over $1 Million worth of foreign orders. The largest of these orders, which
required the highest amount of working capital, was for close to $500,000 for an automated
optical inspection system for Ericsson of Sweden. We learned of the SBA program through
a seminar sponsored by the Commerce Department and promptly applied for a loan to
cover this transaction. The response and guidance that we received from the local SBA
office was exemplary in timeliness and helpfulness, not only in matters pertaining to the
government side, but also to those dealing with the lending institutions that would be
involved in this program. In fact, it was the private lending institutions that were
responsible for the majority of the bureaucratic delays and paperwork that we encountered
in completing the transaction. Mr. John Joyce, who is the officer in charge at the local
office in Boston, personally helped and advised the Company through these negotiations.
Thanks to the program, we were able to borrow $200K, which allowed completion of the
system for shipment to Ericsson, and immediate repayment of the loan. Without the 90%
guarantee from the SBA program our company found it impossible to get bank financing
to cover parts and direct labor to build equipment for this transaction. This is particularly
damaging when we consider that our major foreign competitors have access to generous
export loan programs, in many cases indirectly subsidized by the US taxpayer.
It should be noted that, without the guaranteed loan, this critical order would not
have been built on schedule and would probably have been cancelled, with dire
consequences for our competitive position in Europe and our reputation worldwide. We
view the availability of such a program as playing a major role in the projected growth of
our company in the next two years, from about $2 Million in yearly sales today to over $20
Million by 1997, with the corresponding rise in employment. We also see this as being
critical to position our Company globally to become a leader in the broader field of
automated vision for industrial applications. This market should grow to the billion dollar
79
level in a few years, because it is critical to quality control and productivity for the
manufacturing industries of the future.
Because of the above, I strongly urge the Subcommittee to consider not only
continuing funding of this program, but expanding and strengthening it so that it may
become a significant weapon in our international competitive arsenal. Properly
administered, the program should be extremely effective and almost self-supporting, while
reaping enormous indirect benefits to the country through increase in employment and
economic activity. The value of the SBA Export Working Capital Guarantee program can
be further enhanced by reducing the time to process loan applications; encouraging private
lenders to forego the standard criteria used for evaluating asset based loans that are not
guaranteed ; and simplifying the legal documentation required to close a transaction. These
are transaction based loans with very quick turnaround and very large social payoff in
immediate employment gains and competitive benefits, they should be recognized as such
and freed from the costly and time-consuming legal burdens associated with more
conventional and riskier longer term lending.
Thank you for this opportunity to submit this statement.
Respectfully submitted.
Dr. Juan J. Amodei
80
H'-
^ I^MCI Allied Medical Consultants. Inc.
1120ConnecticutAveN.W, Suite 432 • Washington. D C 20036 • (202)463-8857 • Fax (202) 296-9146
TESTIMONY OF
MS. PHYLLIS A. PRICER
FOR
THE NATIONAL ASSOCIATION OF WOMEN BUSINESS OWNERS
BEFORE THE
COMMITTEE ON SMALL BUSINESS
U. S. HOUSE OF REPRESENTATIVES
ON THE
EXPORT WORKING CAPITAL PROGRAM
AND
THE 7A PROGRAM
SEPTEMBER 6, 1995
81
Testimony of Phyllis A. Pricer
for the National Association of Women Business Owners
before
The Committee on Small Business
U.S. House of Representatives
September 6, 1995
Mr. Chairman and members of the House Small Business Committee.
My name is Phyllis Pricer, and I am submitting this written material to
your Committee in lieu of being able to speak before you this day. I am a
member of the National Association of Women Business Owners (NAWBO),
and also a member of the Board of the Capital Area Chapter of NAWBO. The
organization has 50 chapters in the United States, and represents the
interests of America's 1 .7 million women business owners. I am
president of AMCI-Allied Medical Consultants, Inc., a health care
management, quality assurance and provider staffing firm. We provide
professional health care services to federal and state government medical
facilities, as well as the private medical industry. We have recently
developed two innovative medical health care training programs for both
family care givers and home health aides which we hope to export to other
countries.
82
I am writing today to urge you to keep the Export Working Capital
Program which is administered by the U.S. Small Business Administration.
Many small and medium sized businesses have been able to utilize this
program to obtain working capital and/or a line of credit to expand their
businesses to the overseas market place. Without this program, many
small businesses would have no chance to break into the international
market place. Foreign governments and their banking industries have been
and continue to be aggressive in promoting and financing the export of
goods and services for their small and medium sized companies.
The creation of jobs for the future lies within the small and medium
sized business community. The world is shrinking at a remarkable rate as
far as business and communication is concerned. Without financial
opportunities being provided to enable and encourage U.S. small businesses
to take advantage of international business opportunities, the United
States economy will be the loser. Over the past decade, women have
surged into entrepreneurial ownership at twice the rate of men. Women
now own one-third of all the small businesses in the United States. A
good majority of women owned businesses are service based. Service
based industries are one of the most difficult, if not the most difficult
83
industry in which to attempt to obtain capitalization.
From a woman business owner's perspective, banlcs are not
knowledgeable about service based industries. Each time I have had to
approach a bank for any kind of loan or line of credit, I found it necessary
to educate the banker. And, I have found with few exceptions, banks would
not seriously consider a loan to my company because we are in a service
industry. Last year, the U.S. realized a gross of over $60 billion income
from the export of service based industries.
Another woman business owner, who is Chinese, has tried for about
10 years to develop overseas export business with China in the medical
equipment and supplies arena. She has been unable to do so because she
cannot get the financing which would enable her to competitively enter
the market place. Yet another woman business owner has also taken 10
years to develop international business clients. For years she attended
meetings and conferences held overseas, such as those sponsored by the
World Association of Women Entrepreneurs in order to meet and develop
international business contacts. Obviously, most small businesses are
unable to pursue this option.
Over 75 percent of the work force in the U.S. is employed in service
84
industries. According to data collected from the Bureau of Labor
Statistics, employment in the U.S. is projected to increase by almost 25
million over the next 1 5 years, with almost all of the new jobs in the
service sector. For example, the medical health care industry will be
leading the way through the year 2005 with the fastest increase of any
other occupational group.
Increasingly, small businesses are interested in moving into the
international arena to take advantage of the trade agreement treaties such
as GATT. Without the SBA Export Working Capital Program, most small
and medium sized businesses cannot hope to enter the global market place.
The SBA loan programs have been exceedingly beneficial to us, the
small business community. Their delivery system has been developed with
a view to meet the specific needs of small and medium sized businesses
and they have succeeded by virtue of their commitment to servicing the
small businesses, wherever they are. The SBA export center program is
only a year old, and already it has had a positive impact upon small
businesses entering the global market place. The following is an example
of the positive effect this program, in its present form, has had on a
mid-Western company. This company, the Western Sunflower Company of
85
Colby, Kansas, has gone global ... with assistance from SBA's Export
Working Capital Program.
Western Sunflower was established in 1989 with four employees.
Today it mills, bags, and exports nearly five million pounds of specialty
sunflower seeds a year and employees 20 full-time employees. It has
plans to hire 1 0 more before the end of this year. According to the firm's
president, Al Gerstner, this makes the company one of the top three or
four private-sector employers in this mid-Western town of approximately
6,000 citizens. The company wasn't engaged in exporting until SBA's
EWCP opened the door to the international marketplace. Western
Sunflower applied for and received an export working capital loan for
$575,000. Now, approximately 90 percent of the company's sales are
attributed to exports worth more than $2 million. According to Gerstner,
"The bank feels more comfortable knowing the loan is guaranteed by SBA
... This is an excellent program with a quick turn around."
Small firms try to obtain financing on their own, and cannot do so.
The banks are not interested in small ventures. To banks, such ventures
are fraught with risk, to say nothing of providing a low rate of return.
Banks dealing with international financing are almost exclusively
86
interested in the big companies. Coastal banks have, of course, more
experience in international financing than their peers in the mid-West,
which is why the SBA Export Working Capital Program was such a boon to
the Kansas firm of Western Sunflower.
In the case of my own company, without the SBA loan guarantee, I
would not have been able to develop a home health care training program
which is being readied for export to countries such as Russia, India and
some South American countries. Banks are not willing to consider a loan
for service related industries unless a company has placed collateral
worth as much as five times the amount of the loan requested. How many
small, or even medium sized companies could meet that kind of loan
requirement? I know that I cannot afford to do so.
Here is another example of an SBA EWCP success story. A small
Louisiana company, Southeast Wholesale Seafood Corp, established in
1984, is a company that has 15 employees in the New Orleans area. This
company attributes 50 percent of its frozen seafood sales to exporting,
primarily to Canada and Taiwan.
After having problems finding available working capital, this
company received assistance from the EWCP in a guaranteed loan for
87
$800,000 to meet their pre-shipment exporting needs. The company's
president, Binh X. Do, expects the value of their export sales to reach $5
million in 1995 and anticipates exporting to Hong Kong. The loan due to
SBA's EWCP will allow his company to grow and employ more people.
The SBA program provides a 90% guarantee on loans and lines of
credit. I would respectfully urge this Committee to recommend retaining
the 90% SBA loan guarantee. Without this favorable rate, most small
businesses would have no chance at all of entering into the international
market place. Due to their economic status, historically, most women
business owners have less collateral than their male counterparts.
Lowering the guarantee rate to 70 or 80% would allow the banks to
increase their collateral requirements to a prohibitive level, thus
effectively choking off any hope of small businesses being able to
compete in the global market place. The Export Working Capital Program
is an excellent vehicle to assure that small business have a fair chance at
entering the global market place, and enhances the opportunities to live
the American dream through entrepreneurship.
88
I would like to finish this written testimony with the following
statement. In June of this year, I was honored to be one of Virginia's
elected delegates to the 1995 WHite House Conference on Small Business.
At that conference, more than 2000 delegates, from across the United
States, representing all small businesses, voted in support of
Recommendation 129, which reads as follows:
"Congress and the President authorize and encourage the EX-IM Bank
and the SBA to sponsor revitalized fund programs designed to foster the
financing of international trade, including the new Export Working Capital
Program." We need the continued support of this SBA program.
Thank you for this opportunity.
89
SouthTrust Bank
of Alabama. N.A.
S.MFT SC"P ^5^.:
SouthTrust
Banks
Internalional Deparlmeni September 12, 1995
Honorable Donald Manzullo
Chairman, Subcommittee on Procurement, Exports and Business Opportunites
Small Business Committee, House of Representatives
B-363 Ray bum House Office Building
Washington, DC 20515
SUBJECT: Small Business Credit Efficiency Act of 1995
Dear Chairman Manzullo:
Thank you for the opportunity last September 7th to testify before the joint subcommittee
meeting of the Subcommittee on Government Programs and the Subcommittee on Procurement,
Exports and Business Opportunities regarding the Small Business Credit Efficiency Act of 1995
and the provision for the reduction of guaranty coverage in the SBA Export Working Capital
Guaranty Program (EWCGP). 1 do hope that you and the other committee members will take a
few extra moments to reflect upon the written and oral testimony on this issue prior to your
final determination. It was apparent to me from the concluding commentary by the respective
members present that there are some misunderstandings and, perhaps, some lack of
communication on certain aspects of the EWCGP. Thus, I would like to afford myself this
opportunity for additional comment per your invitation to keep the record open for an additional
thirty days:
1. EWCGP Lending is Tied to Specific Projects: in the concluding comments, it was
noted that most of this lending is for specific projects and, therefore, of low risk. It was
further commented that banks will thus continue to support these transactions even with
a lower guaranty rate given the low risk of these transactions. First, the record will show
that the opposite is true. That is, most of this lending is in support of ongoing facilities
for the financing of export related inventory and receivables. These facilities are typically
renewed on an armual basis. Regardless, the risk of default is little different for specific
transactional lending than for ongoing line facilities. The key risk is, firstly, the
exporter's ability to successfully perform under export sales contract(s) and subsequently
collect on the foreign invoices. Secondarily, in the event of non -performance by the
exporter or the inability to collect on the invoice(s), the risk centers on the ability to
quickly and readily liquidate the collateral for an amount adequately covering the lender's
exposure. The risks are genuinely high regardless if the exposure is project related or
ongoing as in both structures the risk is largely performance related (and commonly the
90
risk qualification centers on non-financial performance criteria -- such as engineering —
where bankers are notably ill-equipped to accurately assess the risks).
2. The Collateral is Easily Identified and Perfected: during concluding comments it was
noted that through prior legal experience fi-om closing commercial loans, one can
conclude that the process for the identification, monitoring and legal perfection of the
lender's claim in export inventory/receivables collateral is likewise simple and effective.
The contrary, however, is much truer in the case of small business export finance. The
primary collateral is pre-export inventory and foreign receivables. The inventory is
ft'equently work-in-process having little, if any, ready liquidation value until in final
form. Furthermore, in virtually all export transactions, there is a significant stage of
inventory-in- transit. Goods are shipped from the borrower's locale to the U. S. ocean
port (or airport) and further shipped great distances (and, at times, for lengthy durations)
and subsequently delivered to their foreign destination. To monitor the location and to
maintain a perfected security interest (control) over "export-in-process" inventory can be
exceedingly difficult. For example, inventory exported to Asia out of the southeastern
U.S. is ft-equently transported by truck, or rail, to the west coast. To be adequately
perfected, a lender needs to file (UCC-1 financing statements) in virtually every state of
transit as well as with the state of the port of loading. Upon delivery in the port, the
issue of competing creditor claims sometimes arises and the near impossible task of
obtaining lien waivers from port authorities. Then, upon loading on to a ship (or
aircraft), there is an issue of maintaining a perfected security interest in the goods while
in the hands of a third party common carrier and beyond the boundaries of the U.S. legal
system. The lender may or may not obtain a secured position via a negotiable bill of
lading and, even with the latter, it is difficult in many overseas ports to effectively
control and monitor the disposition of the goods upon their unloading (and at the mercy
of a foreign legal system). With regards to foreign receivables, these invoices not only
present the normal commercial credit risks as do domestic invoices but carry the added
concern of political risk and currency inconvertability which may impede the buyer's
payment of an invoice (as well as very distinct barriers for legal remedies in the event of
invoice non-payment). Therefore, the comparatively low value of the collateral is the key
cornerstone for requiring the guaranty rate at 90%.
It is the firm opinion of the Bankers' Association for Foreign Trade that a guaranty as low as
75% will negatively impact the credit decision process within banks and lead to the declination
of export small business requests. For cases that are approved, the credit underwriting will be
much tighter and interest cost undoubtedly higher. The net effect will be to reduce the
availability of export finance to the small business sector and, that which is funded with the
support of the governmental programs, will be on stricter terms and at higher cost.
91
Thank you for this opportunity to add to my comments and testimony of September 7th. I
would like to conclude with a reflection on the historical perspective on the federal government's
efforts regarding the fostering and support of export working capital finance. For some years
now, there have been many people laboring behind the scenes to develop a meaningful small
business export program. The task has not been an easy one. Banks are not comfortable with the
added risks that selling internationally entails. Furthermore, simply making smaller loans strains
a bank's efficiency and profit margins (yet export finance loans typically require more overhead
for expertise and added monitoring). Numerous individuals with the SBA, Eximbank and with
many commercial banks throughout the country are dedicated to support quality export growth
from the small business sector, for which finance is a comerstone. A lot of hard work and
compromise led to the watershed event of the harmonized working capital program of 1 994
between the SBA and Eximbank. As you know, early indications are that the program is well
received by both the banking and the export communities. I appeal to you and others on the
committee for common sense; sense to leave what finally seems to be a workable program alone
(at least until more time has elapsed to better judge its effect).
As an industry, we feel that we have finally developed a program that has the potential to truly
make an impact on the growth and development of the small business exports. We urge you to
"not pull the rug out firom under us" at this sensitive juncture and to leave what appears to be a
working program "as is". Rather, we recommend a thorough assessment and analysis of the
EWCGP program after a 36 month period. Including the analysis of what is the minimum
guaranty percentage needed for an effective program (along with an evaluation of all other terms
and parameters of the program).
Thank you again for your interest and deliberation of this mater.
With best regards, I am
Very truly yours,
William C. Cummins
Group Vice President
and
Co-Chairman, Small Business
Export Finance Committee
Bankers' Association for Foreign
Trade
92
LEAWOOD EXPORT FINANCE, INC.
8600 W. 110m St., Suite 130
Overland Park, KS 66210
(913)345-1893
Fax (913) 345-0212
August 31, 1996
The Honorable Donald A. Manzullo
Chairman, Procurement. Exports and Business Opportunities
U. S. House of Representatives
Dear Representative Manzullo:
RE: H.R.2150 and Senate Bill S.895 —
REDUCTION OF SMALL BUSINESS ADMINISTRATION GUARANTEE RATE
I am a member of the Advisory Committee of the Export-Import Banl^ of the United States
["Ex-lm Bank"], representing small business, particularly in the Kansas and Missouri areas.
I am also a small exporter operating in Overland Park, Kansas and El Paso, Texas.
It has come to the attention of other small exporters and me that the above two bills
propose to reduce the Small Business Administration f'SBA'T Guarantee Rate from 90%
to 75% - 80%. Included in this reduction, as the bills are currently written, would be a
corresponding reduction in the current guarantee percentage of 90% under the SBA Export
Working Capital Guarantee Program.
For the SBA, the Export Working Capital Guarantee Program f'EWCGP"] is a special
subset of the 7{A) program that relies on foreign receivables and inventory destined for
export sales, while the remainder of the 7(A) program is concerned with domestic lending.
The SBA's EWCGP is a part of the "harmonization" program with the Small Exporter
Working Capital Guarantee Program of Ex-lm Bank. Applicants' requests are processed
by the SBA If the kian guarantee amounts are less than $750,000 and are "SBA qualified"
businesses, whereas Ex-lm Bank's program is utilized for qualified guarantee amounts in
excess of $750,000.
Over the past year, both Ex-lm Bank and SBA have devoted considerable resources to
provide a harmonized program that offers a meaningful product to small and medium-sized
companies which require financial assistance to grow their export business. The current
legislation, as proposed, will hurt small business and small to medium-sized exporters who
rely on Ex-lm Bank/SBA Working Capital Guarantee assistance in financing their export
transactions. The experience in this first year of "harmonization" operations is very
positive. In Fiscal Year 1995 to date, the SBA has approved 1 32 transactions worth $44.3
million, as compared to FY 1994 wtien 77 transactions worth $27.4 million were approved.
93
The Honorable Donald A. Manzullo
Chainnan, Procurement, Exports and Business Opportunities
U. S. House of Representatives
August 31, 1995
Page 2
In FY 1995 to date, Ex-im Bank has approved 147 transactions worth $241 million and
they anticipate dose to $300 million by the end of the fiscal year. In FY 1994, Ex-lm
approved 164 transactions worth $186 million.
As part of legislation to decrease the guarantee rate for the 7(A) loan programs, the House
Small Business Committee marked up H R2150 on August 4th to lower the guarantee rate
to 80% for loans of up to $100,000 and 75% for loans above $100,000. The ranking
minority member, John LaFalce, offered an amendment allowing the SBA to provide a 90%
guarantee for a revolving line of credit for expgrt purposes with a maximum term of three
(3) years, regardless of the amount of the loan.
Ttie House Small Business Subcommittees on Government Programs and Procurement,
Exports and Business Opportunities have scheduled a joint hearing on Thursday,
September 7th at 10:00 a.m. to examine closely the Export-Import Bank's partnership with
the SBA and to review Mr LeFalce's amendment. Any reduction in cover of the export
workin9 capital guarantee program, whettier through SBA or Ex-lm Bank will
seriously undermine the Government's stated goal of increasing small to medium
business exports.
As a small business owner and employer of 275 people, I can represent to you that 20 jobs
are export dependent. Without the Small Business Export Guarantee provided to me, I
would not have invested the necessary capital to develop my export business. The data
which follows may help to dimension the significance of this bill without the amendment,
and, therefore, its critical importance to small business exporters:
94
Total 1994 Exports
^;r^^
MlSSQiABl l^iMf?^
$5 603 Billion
Non-Agiicuttural Exports
1994
$2.86 Billion
$4 23 Billion
Approximate Number of
Exporters
2,500
3,500
Approximate Number of
Small Business
Exporters (90%)
2.250
3,150
Approximate Number of
Expert Jobs
110,000
125,000
As a member of tlie Ex-lm Bank Advisory Committee, I feel a
responsibility to assist in the continuing efforts to make snnall business
exporters aware of these programs to help grow their export business.
In conjunction with the University of Missouri-Kansas City, I am
presenting to small and midsize exporters a trade finance workshop
which will include the Working Capital Guarantee Programs of Ex-im
Bank/SBA. 77 area exporting companies — representing 5-6,000
employees — have requested space. The need is obviousi
95
The Honorable Donald A Manzullo
Chairman, Procurement, Exports and Business Opportunities
U S House of Representatives
August 31, 1995
Page 4
I look forward to your support in continuing the Working Capital Guarantee Program on its
current level through the SBA and Ex-lm Bank. Please contact me with any questions.
yours,
Robert E. Duncan
President
96
MARNICO CARPET MILLS INC.
P.O. BOX 2726
OAUTON, GEORGIA 30722-2726
U.S.A.
August 30, 1995
Rep. Donald Manzullo
Chairman Subcommittee for Procurement, Exports, and Business
Opportunites .
Washingiion D . C.
Fax: 1-202-2258950
I have been made aware of a hearing of the Small Business Committee
of the Senate to review the Small Business Lending Enhancement Act
of 1995(3-895 & HO 2150). In particular, I am concerned about a
provision to reduce the maximum guaranty coverage under the SBA's
Export Working Capital program from the current 90% to 75%.
As a small business owner that exports 100% of our sales, I am very
concerned about the effect that this provision will have.
Throughout the past ten years, my company has been able to survive
in the export market, thanks to an Export Working Capital Revolving
Line of Credit guaranteed by the U.S. Small Business
Administration, currently renewed under Loan Number EWCP 8525923003
BIR. Without this Guaraunty, our commercial bank would not have
provided the funds necessary to compete in the international
market .
We would not have been able to withstand the usual ups and downs of
the international market without the support of the SBA. If one has
a unique product to offer, then terms and pricing are easy to set,
hill- i -F nriA i «: nomppt-l n<3 ui'»-V\ n^h*r- na'fiiin*, +Vi»n pyi no , e»>-vi (--a ,
quality, and financing are very important. Our concern has to do
witn tne aisposition or commercial oanKs to extena credit
facilities if the coverage falls below 90%. Even in the event that
we find a commercial bank that would extend the credit facility
under this lower coverage, I believe that the financing cost due to
the increased risk to the commercial bank, would affect our
competitive position in the international market.
Without this credit facility, our company would cease to exist.
Before the above legislation is finalized, it is imperative that
the Senate Small Business Committee understands the importance of
the SBft's Export Guaranty Program to offer 90% (not 75%) in order
to assure adequate availability of loans for small business
exporters .
Sincerely,
MARNICO CARPET MILLS INC.
Bruce Lacle
PRESIDENT
cc: Phillip Eskelar- Staff Director
TELEPHONE (708) 277-1140 MANUFACTUHERS AND EXPORTERS TELEX: 271473 MARNICO
FAX: (706) 277-9023
97
The National Association of
Qovemment Guaranteed
-Lenders, Inc.
September 6, 1995
The Honorable Jan Meyers v
Chairwoman
House Small Business Committee
2361 Raybum House Office Building
Washington, DC 208 IS
RE: SBA Export Working Capital Loan Program
Dear Mrs. Mqrers:
The members of the National Association of Oovemment Guaranteed Lenders want to thank
you for your support of the Small Business Administration's 7(a) loan program. This program
provides a vital access to capital that many small businesses would not otherwise have. As you
know this has been a difficult year for the 7(a) program as small business loan demand has £ar
outpaced the Supply of funds available, The leglslatton that has passed your Committee, and
the similar legislation that has passed the Senate, will help correct this problem for the next
fiscal year.
One of the features the industry likes about both bills is that the guarantee percentage
structure is simple and easy to understand. Loans of $100,000 or less will have an 80%
guarantee, and loans over $100,000 will have a 75% guarantee, up to the $750,000 maximtun
guarantee. NAGGL supports this structure, and we believe, for consistency and ease of
operation, all 7(a) loan programs should follow this new guarantee structure, including the
export working capital loan program (EWCLP).
Tlie EWCLP has had very little usage even though it has had the bluest guarantee percentage
available from the SBA. Clearly, a 90% guarantee is not what determines whether a lender will
0.- will not participate in the EWCLP. In August, NAGGL staff polled several lenders who have
used or intend to use the EWCLP. The responses we received were that it was not the
g-jarantee percentage that was the deciding factor, but rather &e knowledge of the program by
.ilie lender, the knowledge of the program by the SBA loan officer, the ease of utilizing the
program, and was there another loan program that better meets the customer needs (e.g. fiaster
application response time).
An excellent example of this is the LowDoc program. Loans of $195,000 or less have carried
90% guarantees for quite some time. It was not until the SBA streamlined the application
p-ocess did loan volume significantly increase. Earlier this year, we surveyed NAGGL members
to see if our members would continue to participate in the LowDoc program at less than a 90%
guarantee. The overwhelming response was yes, they woiild continue to participate.
riather than focus on the guai^uitee percentage, we believe SBA should focus attention to the
EWCLP by better training of their loan officers and participating lenders, improving their
7::arketix]g of the program, and by streamlining the loan application process.
Sincerely, _.
^iiithony R. Wilkmson
P resident & CEO
.^ost Office Box 332 • Stillwater. Oklahoma 74076 • 405/377-4022 • FAX 405/377-3931
98
BANKERS' ASSOCIATION FOR FOREIGN TRADE
212IKSlrccl,NW.Suilc70I tSOCT '«!« (202)452-0952
Wfi<,meion, DC: 20017 DI~B II Fox (202)452-0059
MEMORANDUM
September 14, 1995
Memorandum for: Phil Eskeland
Subject: HR2150
Dear Phil:
As you know, at the joint House Subcommittee hearings on Septemt>er 7, Chairman
Manzullo introduced a letter from Mr. Anthony Wilkinson, President of the National Association
of Government Guaranteed Lender8(NAGGL) as evidence that a reduction in the guaranty
portion of the SBA's WCGP would not have a material effect on these export transactions. In
response, we sent a letter to Wilkln6on(attached) asking him to reconsider his position The
basis for our request was that "trade financing lending Is much different from the financing
typically extended by the membership of NAGGL ' In short, by virtue of their ongoing business,
NAGGL is not en authoritative source with respect to the actual Impact of the proposed
reduction.
Given this dichotomy, my personal view is that NAGGL saw our testimony as an effort to
block rather than simply amend HR2150 and Its companion legislation In the Senate. I hope
the above Is helpful to you and Chairman Manzullo.
Thanks again for meeting with me prior to the hearing; I appreciate the time you and
Laurie took and look fonvard to workir»o with you again.
Regards,
F.Weber
Deputy Director
99
BANKERS' ASSOCIATION FOR FOREIGN TRADE
2I2iKStred,N.W., Suite 701. W»diin«ton,D.C. 200J7
Tde; (202)452-0952 FAX: (202)452-0959
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DIRECTOR. INTF.UNAnoNAL DIVISION
BArBANK
September 12, 1995
Mr. Anthony R. Wilkinson
President & CEO
National Association of Government Guaranteed Lenders, Inc.
P.O. Box 332
Stillwater, Oklahoma 74076
Dear Mr. Wilkinson:
This letter is regarding SBA's Working Capital Guarantee Program
(WCGP) and the effect of the passage of the Small Business Credit
Efficiency Act of 1995 (HR2 150,8 8/95). We are In receipt of a copy of
your September 6 letter to the Honorable Jan Myers, Chairman of the
House Small Business Committee concerning this legislation and the
reduction of the guaranty in SBA's (WCGP) from 90% to 60% in cases
of loans less than $100,000 and 75% for loans above that amount (up
to a maximum of $760,000).
The Banker's Association for Foreign Trade (BAFT) believes that the
reduction In the guaranty coverage of this export program will have a
detrimental effect on this program at a particularly sensitive point in its
history.
As you are aware, the SBA's WCGP has suffered low usage for
various reasons since the program's inception In the early 1980's (as
the Export Revolving Line of Credit Program). In 1994, the SBA -
along with the Export-Import Bank of the United States - developed a
harmonized joint program for providing a unified export working capital
loan guaranty program. A key feature was uniformity in the guaranty,
the SBA guaranty was increased to 90%. The Eximbank guaranty (
which had a similar but noticeably distinct program with the guaranty of
100%) was fBduced to 90%. With the increased uniformity of the
SBA/Eximbank programs, we are now (finally) seeing a meaningful
increase In the use of these programs.
Through July Of fiscal year 1995, the volume under the SBA program
has almost doubled over the previous year with some 150 banks
participating in the program with total guarantees of excess of $52
million. For the full '95 fiscal year, it appears likely that the loans will
exceed 225 and loan volume near $100 million. We anticlpale that this
program could double again next fiscal year. The harmonization
process with Eximbank and, most importantly, the uniformity of the
guaranty coverage has led to a workable and attractive program for the
U.S. commercial banks involved in trade finance.
lOSTKlUNG SOIUND IN IKUNATIONAL HANKING SlNClC 1921
100
However, those banks which are truly active in this field are very concerned that the reduction in
the 8BA guaranty coverage will, almost certainly, yield a precipitous decline In the usage of this
program. Furthermore, should the decline be approved: the SBA program, the sister program of
Exim will likely be reduced as wall. Keep In mind that trade finance lending is much difTerenl
from conventional term lending (as supported by the SBA) and much different from the financing
typically extended by the membership of NAGGL. We typically lend against transitory collateral
consisting of Inventory (often work in process and Inventory in transit) and acquire foreign
receivables. We generally have no commercial real estate, equipment or other fixed assets on
which to "hang our hat" As you might Imagine, when loans of this nature do not perform as
anticipated - albeit Infrequently - the liquidation of the collateral usually yields a low percentage of
recovery - and the guaranty becomes all Important. Therefore, a comparatively high rate of
guaranty coverage Is most appropriate and prerequisite to a successful program.
In the judgement of those banks which are truly active in this field, this proposed reduction in the
SBA guaranty coverage will yield a precipitous decline in the usage of this program. BAFT and,
in particular, Its Small Business Export Finance Committee, urgently requests the NAGGL
reconsider its position on this important Issue to those In our industry. On September 7, 1
testified before the Subcommittees on Government Programs and Procurement, Exports and
Business Opportunities of the Committee on Small Business about the potential adverse impact
of the Small Business Enhancement Act of 1994, A copy of my testimony Is attached. We
understand that a critical review of this Issue is going to occur on or about September 12 and - if
at all possible I would greatly appreciate your comment on this request as soon as possible
We strongly feel that regardless of any further action on this provision, the legislation will be
passed in the House soon. This legislation has already been approved by the House Small
Business Committee and will be scheduled tor a full House vote shortly. The Senate has already
passed a similar bill.
I would be delighted to discuss this matter with you first hand, please feel free to call me at any
time.
Thank you for your attention and Interest In this matter.
Sincerely,
uA
William C. Cummins
Co-Chairman, Small Business Export Finance Commillee
Bankers' Association for Foreign Trade
Group Vice President
SouthTrusI Bank of Alabama
End.
101
Export-Import Bank
OF THE United States
February 27, 1996
The Honorable Donald Manzullo
US House of Representatives
Washington, DC 20515
Dear Congressman Manzullo:
Recently the Wall Street Journal carried an article regarding changes made by the Export-Import
Bank of the United States (Ex-lm Bank) to its Working Capital Program. As the article points
out, this program demonstrates our commitment to improve the ability of small American
companies to compete in international markets.
After examining our programs and reducing paperwork requirements for small business loans,
the Bank marketed its guarantee programs to small business lenders. In Fiscal Year 95, small
business transactions accounted for almost 80% of our deals and 18% of their dollar volume.
The Export-Import Bank will continue to look at ways to attract more small business customers
as a way to contribute to fttture U.S. job growth.
For your information, I have enclosed a copy of the Journal article and a press release describing
the recent improvements to our Working Capital Program. If I can provide you with
additional information about these programs, please contact my office.
Sincerely,
Maria Luisa Haley /
Director '
81 1 Vermont Avenue, N.W. Washington, D.C. 20571
102
^OSTON PUBLIC LIBRARY
^
EX'iMBANK
Jobs through Exports
3 9999 06350 052 2
News Release
FOR IMMEDIATE RELEASE
JANUARY 24, 1996
CONTACT: Linda Formella (202) 565-3200
Expands Small Business Program
EX-IM BANK ANNOUNCES WORKING CAPITAL GUARANTEE CHANGES
TO BENEFIT SMALL BUSINESS
The Export-Import Bank of the United States (Ex-Im Bank) has authorized changes to
its Working Capital Guarantee Program to make it easier for small businesses to obtain
working capital to produce and market U.S. products and services for export. The changes
will take effea on April 1, 1996.
In a move to encourage use of the Working Capital Guarantee Program, Ex-Im Bank's
Board of Directors approved several changes, including more flexible collateral requirements
and expanded Delegated Authority to bring more lenders into the program.
"These are significant changes to Ex-Im Bank's Working Capital Guarantee Program
that will enable more small businesses to get into exporting," said Direaor Maria Luisa M.
Haley, whose area of responsibility is the Bank's small business policy. "In fiscal year 1995,
the Bank authorized over $300 million under the Working Capital Guarantee Program.
These changes will help Ex-Im Bank leverage its resources and improve customer service to
small business exporters at the local level."
Changes to the Working Capital Guarantee Program include:
• Expanded Delegated Authority - An additional level of Delegated Authority, Level
"AA" has been created, which will allow lenders to approve loans up to a total of
$5 million per exporter, with a lender total limit of $75 million. Borrower and lender
limits of the two previous lending levels have also been increased: Level "A" lenders
now will be able to approve loans up to a total of $3.5 million per exporter, with a
lender total limit of $50 million. Level "B" lenders now will be able to approve loans
up to $2 million per exporter, with a lender total limit of $25 million.
• Delegated Authority Facility Fee Sharing - Ex-Im Bank will share its facility fee (for
example, 1.50 percent of the loan amount) with Delegated Authority lenders. For all
loans of $2 million and under, the lender will retain 1.25 percent and remit 0.25
percent to Ex-Im Bank. For loans over $2 million, the facility fee on the portion
exceeding $2 million will be shared equally between the lender and Ex-Im Bank.
Export-Import Bank of the United States
8 1 1 Vermont Avenue, N.W. Washington, D.C. 20571
(800) 565-EXIM (202)565-3946 FAX: (202) 565-3380
103
• Collateral Requirements - Ex-Im Bank has widened the range of acceptable collateral
for working capital guarantees in two ways: First, costs incurred by service companies
in the performance of export sales, including engineering, design, labor, and overhead
expenses related to specific contracts, may now be included in the collateral base. This
change will facilitate working capital loans for service industries such as engineering,
environmental consulting, and architectual firms that need working capital but lack
more traditional collateral such as inventory. Second, Ex-Im Bank may now customize
certain loan structuring requirements on a case-by-case basis for companies whose
accounts receivable are due and collectible through their foreign-based affiliates. In
addition, the Bank has reduced the collateral requirement for performance guarantees
from the current 50 percent to 25 percent.
In fiscal year 1995, Ex-Im Bank approved a record number of small business
transactions that accounted for 78 percent of its authorizations. Working capital guarantees
totaled $306 million, a 70 percent increase from the $180 million authorized in fiscal 1994.
Ex-Im Bank is an independent U.S. government agency that helps finance and promote
the sale of U.S. goods and services around the world.
###
(The Bank follows the AP Stylebook, which states that Export-Import Bank of the United
States IS the acceptable first reference and Ex-Im Bank is acceptable on second reference.)
104
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