Export Finance: Federal Efforts to Support Working Capital Needs of Small
Business (Letter Report, 02/13/97, GAO/NSIAD-97-20).
Pursuant to a congressional request, GAO reviewed the current government
programs that provide export working capital for small- and medium-sized
enterprises (SME), focusing on: (1) federal and state approaches for
providing export working capital; (2) federal efforts to harmonize the
export working capital programs of the U.S. Export-Import Bank
(Eximbank) and the Small Business Administration (SBA); (3) issues
associated with increasing the number of cooperative agreements with
lenders and devolving greater responsibility for export working capital
programs to the states; and (4) the potential implications of
transferring SBA's export working capital program to Eximbank.
GAO found that: (1) Eximbank and SBA have programs that provide
guarantees to facilitate export working capital loans for SMEs, however,
the agencies emphasize different delivery approaches; (2) Eximbank
implements its program primarily through a specific division within the
agency and a network of lending institutions that have been delegated
with authority for approving the agency's working capital guarantees;
(3) SBA relies primarily on specialists with lending authority that it
has assigned to the U.S. Export Assistance Centers network and on the
agency's 69 district offices to implement its working capital program;
(4) both Eximbank and SBA have established other arrangements with state
and local offices to help administer their working capital programs; (5)
eight states have export guarantee programs specifically geared to
assisting small businesses which provide a wide range of funds, staff,
and activity levels involving export financing for SMEs; (6) Eximbank
and SBA have harmonized certain aspects of their export working capital
guarantee programs; (7) while harmonization was underway, Eximbank and
SBA made other changes aimed at improving their own export finance
assistance programs for small businesses; (8) these efforts to harmonize
and improve their programs appear to have helped simplify the lending
process, increase the number and value of loans guaranteed, and expand
the number of exporters and lenders who participate in the programs,
however, some program differences remain; (9) to leverage federal funds
and provide SMEs with more export financing, Eximbank and SBA have set
up cooperative arrangements with both the private and public sectors;
(10) Eximbank also has a pilot program underway that delegates lending
authority to six state export finance organizations; (11) the potential
to further expand cooperative agreements would be affected by various
factors; (12) the Trade Promotion Coordinating Committee proposed
transferring SBA's Export Working Capital Program to Eximbank if
harmonization efforts were unsatisfactory; (13) GAO identified a number
of factors that would need to be considered before any transfer of
program responsibility from SBA to Eximbank were to take place; and (14)
these factors are: (a) some exporters currently served by SBA may not be
served by Eximbank; (b) the Eximbank and its network of delegated
authority lenders may not be accessible to some SMEs currently assisted*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-97-20
TITLE: Export Finance: Federal Efforts to Support Working Capital
Needs of Small Business
DATE: 02/13/97
SUBJECT: Exporting
Business assistance
State programs
Interagency relations
Capital
Government guaranteed loans
Cooperative agreements
Federal/state relations
Sales promotion
International trade
IDENTIFIER: SBA Export Working Capital Program
SBA Export Revolving Line of Credit Program
SBA 7(a) Loan Program
California
Florida
Georgia
Maryland
Massachusetts
Minnesota
South Carolina
Eximbank Working Capital Guarantee Program
Eximbank City/State Program
SBA Preferred Lenders Program
Eximbank Delegated Authority Program
Kansas
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Cover
================================================================ COVER
Report to Congressional Requesters
February 1997
EXPORT FINANCE - FEDERAL EFFORTS
TO SUPPORT WORKING CAPITAL NEEDS
OF SMALL BUSINESS
GAO/NSIAD-97-20
Export Finance
(711171)
Abbreviations
=============================================================== ABBREV
Eximbank - U.S. Export-Import Bank
SBA - Small Business Administration
SME - small- and medium-sized enterprises
TPCC - Trade Promotion Coordinating Committee
USEAC - U.S. Export Assistance Centers
Letter
=============================================================== LETTER
B-275002
February 13, 1997
The Honorable Christopher S. Bond
Chairman, Committee on Small Business
United States Senate
The Honorable Donald A. Manzullo
Chairman, Subcommittee on Procurement, Exports,
and Business Opportunities
Committee on Small Business
House of Representatives
As you requested, we reviewed the current government programs that
provide export working capital for small- and medium-sized
enterprises (SME). This report (1) describes federal and state
approaches for providing export working capital, (2) assesses federal
efforts to harmonize the export working capital programs of the U.S.
Export-Import Bank (Eximbank) and the Small Business Administration
(SBA), (3) discusses issues associated with increasing the number of
cooperative agreements with lenders and devolving greater
responsibility for export working capital programs to the states, and
(4) examines the potential implications of transferring SBA's export
working capital program to Eximbank.
BACKGROUND
------------------------------------------------------------ Letter :1
According to the Trade Promotion Coordinating Committee (TPCC),\1 one
of the greatest obstacles to increased U.S. exports faced by SMEs is
the lack of sufficient working capital. Working capital is used to
finance the manufacture or purchase of goods and services. Eximbank
and SBA have programs designed to increase the availability of export
working capital to SMEs from the private sector by encouraging
greater lender participation in export financing. These programs
provide loan repayment guarantees that reduce the risk associated
with such loans. Some states also have programs to assist SMEs in
obtaining working capital.
Eximbank facilitates export financing through its Working Capital
Guarantee Program, which is authorized by the Export Trading Company
Act of 1982 (P.L. 97-290, Sec. 206, Oct. 8, 1982). During fiscal
year 1995, Eximbank guaranteed almost $302 million in export working
capital loans, which represented about 3 percent of Eximbank's total
dollar authorizations for the year. Over 97 percent of the exporters
assisted by Eximbank through the program during fiscal year 1995 were
self-certified as small businesses, as defined by SBA regulations (13
C.F.R. Part 121).
SBA developed its Export Working Capital Program (formerly known as
the Export Revolving Line of Credit) in response to a requirement in
the Small Business Export Expansion Act of 1980 (P.L. 96-481, Sec.
112, Oct. 21, 1980). SBA's program falls within the statutory
authority of the agency's regular business loan guarantee program,
known as the 7(a) program.\2 Under the 7(a) program, SBA guarantees
private lender loans to small businesses that have been unable to
obtain financing. During fiscal
year 1995, SBA guaranteed about $69 million in export working capital
loans, which represented less than 1 percent of SBA's total 7(a)
program. All exporters assisted through SBA must qualify under the
agency's definition of a small business. During fiscal year 1995,
over 90 percent of the businesses assisted through SBA's working
capital program had less than 50 employees.
In its 1993 report to Congress, TPCC made a series of recommendations
to increase the effectiveness of U.S. export financing programs.\3
One recommendation called for the establishment of one-stop shops,
that is, the U.S. Export Assistance Centers (USEAC), as a single
point of contact for all federal export promotion and finance
programs.\4 Another recommendation called for federal agencies to
encourage qualified state or local export finance entities to enter
into cofinancing arrangements in which risk is shared. A third
recommendation called for streamlining and harmonizing key features
of Eximbank and SBA's working capital guarantee programs to make them
more customer-focused and take advantage of the agencies' comparative
strengths. According to TPCC, harmonization was to give SMEs access
to working capital through a broader nationwide network of lenders on
a more consistent, efficient, and effective basis. Key features to
be harmonized included developing uniform applications, accompanying
documentation, and underwriting standards. Harmonization was also to
include a market segmentation plan.
--------------------
\1 TPCC is an interagency group responsible for developing and
coordinating U.S. export promotion programs.
\2 This program is named after section 7(a) of the Small Business Act
(15 U.S.C. 636).
\3 Toward a National Export Strategy, Trade Promotion Coordinating
Committee, September 1993.
\4 The Department of Commerce, Eximbank, and SBA have assumed primary
responsibility for establishing and operating these centers. For
more information on the implementation of USEACs, see U.S. Export
Assistance Centers: Customer Service Enhanced, But Potential to
Improve Operations Exists (GAO/T-NSIAD-96-213, July 25, 1996).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Eximbank and SBA have programs that provide guarantees to facilitate
export working capital loans for small- and medium-sized enterprises;
however, the agencies emphasize different delivery approaches.
Eximbank implements its program primarily through a specific division
within the agency and a network of lending institutions that have
been delegated with authority for approving the agency's working
capital guarantees. SBA, on the other hand, relies primarily on
specialists with lending authority that it has assigned to the USEAC
network and on the agency's 69 district offices to implement its
working capital program. Also, both Eximbank and SBA have
established other arrangements with state and local offices to help
administer their working capital programs. In addition, eight states
have export guarantee programs specifically geared to assisting small
businesses.\5 The state programs provide a wide range of funds,
staff, and activity levels involving export financing for SMEs. For
example, in fiscal year 1996, the value of loans guaranteed ranged
from $55,000 in Georgia to $39.5 million in California.
Eximbank and SBA have harmonized certain aspects of their export
working capital guarantee programs, including the guarantee coverage,
application form, and initial application fee. While harmonization
was underway, Eximbank and SBA made other changes aimed at improving
their own export finance assistance programs for small businesses.
These efforts to harmonize and improve their programs appear to have
helped simplify the lending process, increase the number and value of
loans guaranteed, and expand the number of exporters and lenders who
participate in the programs. However, some program differences
remain. For example, there are differences in Eximbank's and SBA's
credit qualification requirements and fees for processing guarantees.
To leverage federal funds and provide SMEs with more export
financing, Eximbank and SBA have set up cooperative arrangements with
both the private and public sectors. Eximbank also has a pilot
program underway that delegates lending authority to six state export
finance organizations.\6 However, the potential to further expand the
use of such cooperative agreements would be affected by various
factors, such as the need for oversight and monitoring obligations at
the federal level, legal prohibitions that may prevent states from
offering state-backed guarantees, and varying amounts of state
commitment to the area of export financing.
TPCC proposed transferring SBA's Export Working Capital Program to
Eximbank if harmonization efforts were unsatisfactory. We found that
Eximbank and SBA have made progress in harmonizing their programs.
We identified a number of factors that would need to be considered
before any transfer of program responsibility from SBA to Eximbank
were to take place. These factors are (1) some exporters currently
served by SBA may not be served by the Eximbank, (2) the Eximbank and
its network of delegated authority lenders may not be accessible to
some SMEs currently assisted by SBA, and (3) the consolidation of the
programs may lead to only minimal cost savings.
--------------------
\5 States that provide export working capital guarantees are
California, Florida, Georgia, Kansas, Maryland, Massachusetts,
Minnesota, and South Carolina.
\6 The six states in Eximbank's pilot program are California,
Florida, Georgia, Maryland, Massachusetts, and Minnesota.
EXIMBANK, SBA, AND STATES USE
VARIOUS DELIVERY APPROACHES
------------------------------------------------------------ Letter :3
Eximbank and SBA emphasize different delivery approaches for
facilitating their programs. Eximbank relies on its U.S. Division
and network of delegated authority lenders, whereas SBA relies
primarily on staff with lending authority it has assigned to the
USEACs and on its network of district offices. Eight states also
have export finance programs that provide working capital guarantees.
Levels of financing and contractual arrangements for these guarantees
vary considerably among the states.
EXIMBANK RELIES HEAVILY ON
DELEGATING AUTHORITY TO
LENDERS
---------------------------------------------------------- Letter :3.1
Eximbank's U.S. Division, staffed with six loan officers and one
vice president, has primary responsibility for administering the
Working Capital Guarantee Program as well as some marketing
responsibility. This division processed all the agency's export
working capital guarantees until the beginning of fiscal year 1995.
Over the past couple of years, the division has expanded its outreach
to SMEs through its Delegated Authority Program. Under this program,
a private lender and Eximbank enter into an agreement that allows the
lender to approve Eximbank guaranteed loans to exporters without
first having to submit individual applications to Eximbank for
approval. During fiscal year 1996, delegated authority lenders
approved 192 loans, 69 percent of the agency's export working capital
guarantee transactions. These transactions represented 55 percent of
the $413 million in loans guaranteed under Eximbank's program. (See
app. I for a map showing the locations of Eximbank's U.S. Division
and delegated authority lenders.)
Although the U.S. Division and delegated authority lenders are
central to Eximbank's Working Capital Guarantee Program, the agency
has other resources and arrangements for marketing and supporting the
program. These include the following:
-- Eximbank's Business Development Division promotes and markets
the agency's small business programs, including the Working
Capital Guarantee Program. This group includes Washington-based
staff and five regional offices,\7 four of which are collocated
within USEACs. According to the Eximbank official responsible
for regional office operations, the agency's limited regional
staff of 21 employees is expected to focus primarily on
increasing the participation of banks, brokers, and other
intermediaries in these programs.
-- Eximbank has established partnerships with state and local
government offices and private sector organizations under its
City/State Program. These partners are to act as liaisons with
their export communities, market Eximbank programs, and submit
applications on behalf of small businesses. During fiscal year
1995, however, only 8 of Eximbank's
31 partners reported working capital activity under the program.
Effective in April 1996, Eximbank initiated a pilot program to
strengthen its program by paying its local partners a packaging
fee for applications submitted directly to the agency and a
finder's fee for referrals to delegated authority lenders that
result in working capital loans. In September 1996, Eximbank
initiated another pilot program to delegate authority for
approving guarantees to six state partners.
-- Eximbank has an agreement with the Private Export Funding
Corporation, a private consortium of commercial banks and other
users of Eximbank, in which the company (1) acts as the lender
of last resort for exporters that obtain a preliminary working
capital commitment from Eximbank but are unable to obtain
financing from commercial sources and (2) purchases Working
Capital Guarantee Program loans made by small and regional banks
that require help in supporting small business exporters.
Under the Working Capital Guarantee Program, Eximbank guaranteed
179 loans valued at almost $302 million during fiscal year 1995. As
of June 1996, the default rate for exporters whose loans were
guaranteed during fiscal year 1995 was 2.2 percent (4 defaults out of
179). The agency estimated that the cost associated with
administering the program during fiscal year 1995 was about $912,000.
This estimate included the costs for compensation, benefits, and
overhead attributable to the U.S. Division.
--------------------
\7 Eximbank's regional offices are located in Chicago, Houston, Long
Beach, Miami, and New York.
SBA RELIES ON USEACS AND
DISTRICT OFFICES
---------------------------------------------------------- Letter :3.2
Although SBA's Office of International Trade is responsible for
overseeing its Export Working Capital Program, the agency relies
primarily on USEACs and their district office network to implement
the program. SBA has staffed the 15 USEACs with 20 international
trade and finance specialists. These specialists help SBA's 69
district offices reach their Export Working Capital Program goals by
marketing and promoting the program and working directly with the
exporting and lender communities to structure loans and package
applications for loan guarantees. Applications are sent to 1 of
25 district offices designated as export working capital processing
centers, where they are reviewed and approved or rejected. An SBA
official estimated that the specialists' spend about 85 percent of
their time on the program and the remaining 15 percent on other
trade-related activities. (See app. I for a map showing the
locations of the USEACs and SBA district offices.)
Even though SBA works primarily through USEACs and district offices,
it has other resources and arrangements that help market and support
the program. These include the following:
-- SBA has coguarantee agreements with California, Kansas, and
Florida. Under these agreements, SBA and the states guarantee a
portion of the export working capital loan and share, on a
proportional basis, any resulting losses and recoveries.
California has been by far the most active state, with 25 export
working capital loans valued at $8.8 million.
-- SBA has agreements with at least 26 local private sector
entities to encourage them to act as packaging intermediaries
for its Export Working Capital Program.\8
-- SBA uses staff from its small business development centers,
about 30 of which have established separate international trade
centers, to help market its financial products, including export
working capital guarantees.
-- SBA's Preferred Lender Program, which is part of its Export
Working Capital Program,\9 is similar to Eximbank's Delegated
Authority Program. However, according to an SBA official, only
1 of about 12 preferred lenders had provided export financing
under the program, as of August 1996.\10
Under the Export Working Capital Program, SBA guaranteed 190 loans
valued at about $69 million during fiscal year 1995. As of August
1996, the default rate for exporters whose loans were guaranteed
during fiscal
year 1995 was 1.6 percent (3 defaults out of 190). The agency
estimated that costs associated with administering its program during
fiscal year 1995 totaled $461,667. This estimate includes an
allocated portion of SBA's costs related to staffing and supporting
USEACs.