The U.S. Export-Import Bank (ExIm Bank) is in the throes of its toughest experience yet.
Congress is heatedly debating whether to reauthorize the ExIm Bank’s charter, and if it doesn't act by September 30th, the agency will no longer be able to extend new loan guarantees to U.S. exporters. The Bank and its supporters have said that a failure to reauthorize the 80-year-old institution will hurt exports and cause companies to cut jobs.
The many critics argue the bank picks winners and losers, is used by large corporations that could have access to affordable bank lending – in Washington, ExIm has long been talked about as “Boeing’s Bank”. Tea Party is of course overall fed up with federal programs and spearheads also ExIm opposition.
These battles are not new: the agency is notoriously politicized in Washington and repeatedly struggles to secure Congressional re-authorization. Yet never before has the fight been so bloody.
Here at TradeUp we wanted to elucidate what ExIm Bank is all about - and we do lean on thinking the ExIm should be allowed to keep going, for three reasons.
- First, all other major economies have export credit agencies much like ExIm aimed at helping their companies get an edge in world trade. By now, ExIm's annual support to U.S. firms pales before that of China, for example. Without the ExIm Bank, many U.S. companies are immediately placed at a disadvantage in international markets.
- Second, ExIm has not lost any taxpayer monies: it is not exactly a federal agency that is draining the budget and expanding the deficit.
- Third, ExIm helps U.S. SMEs export. In our view it does a worthy job in this area, but it also has a great deal to improve, to enhance customer service to accommodate today’s realities of doing global business – something we at TradeUp work every day to bridge.
Let’s look at what ExIm has done for SMEs in the U.S. in the past decade, and what some of the challenges are.
What Does ExIm Bank Do for Small Business?
ExIm Bank and the Small Business Administration (SBA) have a number of instruments for exporters, such as guarantees on bank loans sought by exporter SMEs, and, in the case of the Ex-Im Bank, trade credit insurance that guarantees an SME gets paid for a shipment even if the foreign buyer failed to pay.
In 2013, Ex-Im authorized a record 3,413 small business transactions, of which the bulk, or 83.4 percent, were export credit insurances rather than working capital loan guarantees (figure 1). Ex-Im authorizations supported $5.2 billion in small business loans, of which 54 percent went towards export credit insurance and 35 percent towards working capital loan guarantees (figure 2).
Figure 1– Number of Ex-Im Bank-Supported Export-Related Loan Authorizations to Small Businesses in 2000-2013
Figure 2 – $ Value of Ex-Im Bank-Supported Export-Related Loan Authorizations to Small Businesses in 2000-2013
In total, in 2013, ExIm Bank approved more than $27 billion in total authorizations, itself estimating it supported an estimated $37.4 billion in U.S. export sales and approximately 205,000 U.S. jobs in communities across the country. ExIm transactions overall support only a small share of U.S. exports, typically 1-2 percent. ExIm’s small business portfolio has much to improve: it is less than a fifth of the total amount of support in dollar value. Ex-Im Bank has over the past three years not met its target of 20 percent of small businesses transactions as the amount of all transactions. However, in terms of numbers, small business transactions consistently make up over 80 percent of transactions (figure 3). In other words, ExIm serves a larger number of small businesses than it does large companies, yet large companies absorb most of its dollars. Of course, their transactions are typically larger.
Figure 3 – ExIm Bank-Supported Export-Related Loan Authorizations to Small Businesses in 2000-2013 as % of all Authorizations
However, ExIm critics and also some proponents point out that large companies should not even figure in ExIm's portfolio, given that they could typically access financing from private capital markets. In this line of thinking, large companies do not face a financing gap that needs bridging by the government, while small businesses often do: for example, even if while viable exporters, they are too nascent and small for banks. We think these views have merit. In a 2010 U.S. International Trade Commission (U.S. ITC) survey of 2,349 small and mid-size enterprises (SMEs) and 849 large firms, 32 percent of SMEs in manufacturing sectors and 46 percent of SMEs in services sectors cited obtaining financing as “burdensome” to conducting cross-border trade. By contrast, only 10 percent of large manufacturing firms and 17 percent of large services firms shared this view.
For small businesses looking to export or diversify their exports to new markets, access to capital is a critical constraint. Of 19 impediments to trade offered in the U.S. ITC survey, obtaining financing ranked first among manufacturing SMEs and third among services SMEs (Figures 4 and 5). Typically exporters in industries that are more dependent on external finance (such as transportation equipment and other durable goods) or that have few assets that can be used as collateral (such as information technology and professional services) find the struggle to secure financing particularly acute. Recent literature finds that those firms that are credit constrained are less likely to export.
Figure 4. U.S. manufacturing SMEs cite obtaining financing as the leading impediment to engaging in global trade
Figure 5. U.S. services SMEs view obtaining financing As the third leading impediment to engaging in global trade
We also think ExIm would have far easier time being reauthorized if it were more active with small businesses - after all, very few folks in Congress would opposed helping small businesses.
Why Do SMEs Get <20% of ExIm’s Support Dollars?
There are several challenges facing ExIm in dealing with small businesses, starting with long processing times that discourage companies from applying for loan guarantees, and high local content requirements. ExIm Bank’s local content requirement mandate that 50 percent of the cost of the final product be of U.S. origin. This rule has persisted in the books, even though tens of thousands of American SMEs are highly globalized—over 80,000 U.S. SME exporters also import—and use a large portion of foreign inputs in producing their export products.
The uptake for the Ex-Im Bank’s new direct loan to SMEs, the Global Express Loan that provides export working capital loans up to $500,000, has been limited, due to high upfront fees and restrictive requirements. Ex-Im Bank and SBA are also spread thin, with limited staff to reach SMEs on the ground, and especially Ex-Im Bank staff is incentivized to focus on large companies rather than SMEs.
A very vexing problem is SMEs and banks' lack of awareness of, and challenges with, existing export finance programs means that few companies take advantage of them. In a 2013 survey by the National Small Business Association, as many as 82 percent of small businesses already engaged in exporting reported that their lending institution never discussed ExIm products with them, and some 22 percent had never even heard of the ExIm Bank. Only 12 percent reported using an Ex-Im product to help finance their export activities, and just 5 percent had used Ex-Im financing through a commercial bank. In addition, only 3 percent had made use of SBA’s export lending programs.
What is more, even if SMEs are aware of federal programs, they will not seek access to these programs if they view the application process as excessively slow, and they will not qualify for these programs unless they meet the various regulations, such as onerous local content rules.
The ExIm Bank has challenges in expanding the SME portfolio. In part, these findings in part reflect the federal agencies’ limited capacities to market to SMEs and lenders across the United States. To illustrate, Export Development Canada (EDC), Canada’s export credit agency, has a staff of approximately 1,200 to serve the country’s 45,000 exporters, while the ExIm Bank has a staff of 400 to serve nearly 300,000 exporters.
ExIm has ways to go to improve its marketing and client service for SMEs. Also the incentive systems need to be revised for ExIm officers to be rewarded for working with small businesses. And cumbersome local content rules should go, to accommodate the thousands of U.S. small businesses that compete internationally precisely because they can access affordable services and supplies from overseas.
Since major reforms are unlikely even if the Bank survives, we also think America's state governments can play an important role in supporting exporters, perhaps through establishing their own ExIm Banks that could then create a race to the top and press ExIm to improve too. Here in California there is talk about revising the California Export Finance Office (CEFO), which offered a variety of guarantees for smaller export-related loans from its inception in 1985 until 2003, when state budget problems forced its closure. The instruments provided by CEFO were on the whole more flexible than those offered by the federal government and were targeted to SMEs in particular.
And of course, financial innovation is needed to catalyze financing for export-driven companies. That's what we at TradeUp work to do every day.