SMEs on the west coast of North America have big aspirations for export growth. But access to finance is a nightmare. Sarah Rundell investigates.
The 140-hectare Jardim Gramacho landfill on the outskirts of Rio de Janeiro is one of the biggest in the world. Closed last year, the site has taken around two thirds of Rio’s waste since the 1970s. Now harmful methane and carbon dioxide, the by-products of decomposition that can linger for decades beneath the surface, will be harnessed in one of Brazil’s biggest biogas projects.
At the forefront of the project is Californian renewables company FirmGreen, whose pioneering technology is fundamental to extracting the gas. “We drill down into the trash and extract the gas,” explains FirmGreen’s founder and CEO Steve Wilburn.
“In a patented process we bring that gas to a plant where it is cleaned and made into vehicle fuel, becoming the product equivalent to natural gas.” Wilburn hadn’t considered exporting his technology until he was approached by the Brazilian company behind the biogas plant, Gás Verde, in 2008. “They had never imported anything before and I’d never exported before,” he recalls. “It really was a question of how do you get from New Port Beach California to Rio de Janeiro.”
FirmGreen is one of thousands of America’s west coast SMEs building an export portfolio for the first time. The company’s success is indicative of the role SMEs are playing in the US’s export resurgence. According to statistics from the National Export Initiative, the government’s policy to double US exports by 2014, exports reached a record US$2.2tn in 2012, higher than any other time in America’s history.
West coast SME exporters include agricultural businesses, technology companies and mining equipment manufacturers, renewable energy manufacturers, medical equipment companies and businesses making aircraft parts. More unusual businesses are also getting on the export ladder, such as Los Angeles-based Ceilings Plus, a manufacturer and installer of speciality ceilings.
The company’s domestic clients include Washington’s Newseum and the Clinton Presidential Library in Little Rock, but it now exports to five countries too. “More than 50% of our business now comes from exports and we have created 73 new jobs,” says Nancy Mercolino, president of Ceilings Plus. “Exports have increased our bottom line, and I am looking forward to reaching more international markets.”
Wouldn’t it be nice?
One of the biggest challenges SMEs face in their quest to export is access to finance; they tend to bank with smaller, community banks less willing to provide trade finance. SMEs can often be financed by venture funds and lack balance sheet history or income statements, unable to support unsecured credit.
Community banks’ loan portfolios typically include real estate, commercial and industrial loans or professional loans to doctors or lawyers. They say they are wary of lending to US companies that “spend millions” on a product that an overseas buyer then finds difficulty paying for. They list specific country risks and legal challenges, particularly around food exports that can be banned halfway through the transaction, as reasons not to lend. “Most banks want more mature companies anyway,” says FirmGreen’s Wilburn, whose local bank would only finance his working capital.
“If they are a long-standing client it helps, but US banks are strict on foreign buyer risk and without adequate collateral to support the loan request it is difficult to obtain financing,” says Alex McCombs in Bank of America Merrill Lynch’s (BofAML) trade finance division, which lends to SMEs with the Export-Import Bank of the US (US Exim) guarantees in place. “On a US Exim-supported guarantee the bank may advance up to 90% against eligible foreign receivables and 75% against eligible export inventory and may selectively advance against the inventory in transit,” says McCombs.
The proactive role of US Exim is one of the reasons behind the boom in America’s SME exports. Its insurance offering covers up to 95% of the risk of the US exporter not being paid by the foreign client. It’s an offering that is helping SMEs which had previously insisted on receiving cash for their goods in advance and those that have missed out on export opportunities because they can’t allow their customers 60 or 90 days’ credit.
“Without a US Exim guarantee or export credit insurance support US banks would normally require a letter of credit from an acceptable foreign bank guaranteeing the buyer would pay when goods are delivered,” says BofAML’s McCombs. “Without such guarantees most lenders would have no appetite for this risk. It’s where US Exim plays a critical role.”
Other US Exim products include guarantees for exporters seeking to borrow more capital from banks to finance export growth under its working capital guarantee programme. “If an order is larger than normal and exhausts internal financial resources we will guarantee a bank loan by 90%,” says David Josephson, head of US Exim’s west coast regional office in Orange County.
The bank’s programme has US$3.2bn-worth of authorisations covering 600 companies accounting for US$5 to 10bn of exports and tens of thousands of US jobs. But some SMEs say they struggle to borrow from banks even if they have guarantees in place. In these cases although Josephson says the bank “would rather guarantee a loan than make the loan ourselves” US Exim also offers buyer finance via its Global Credit Express. Here the bank offers a direct line of credit priced off US Exim’s commercial reference loan rate. It was US Exim’s buyer financing that allowed FirmGreen to begin its export foray.
The company didn’t need to borrow working capital but US Exim provided a competitive finance package for Gas Verde, FirmGreen’s Brazilian client, to buy the US-made equipment. It provided a 12-year direct loan which financed 85% of the US$50mn purchase price. “It would have consumed all my resources if I had had to self-finance this project,” says Wilburn. Under the deal, US Exim reimbursed Gas Verde on proof that the goods had been delivered. Cape Verde then pays the loan off in instalments.
Banks note other trends in the SME financing space. Citibank, which classes SMEs as companies with revenues of up to US$1bn, says it has supported trade finance for west coast SMEs that are increasingly manufacturing goods offshore, in Asia for example.
“These companies are then shipping the goods from the country wherein the goods were manufactured directly to the country in which the goods are purchased,” explain Stuart Roberts, global trade sales head. “This dynamic can be challenging for lenders as this trend requires a truly global bank.”
Roberts also notes that demand for trade finance from US exporters has eased as the US economy starts to pick up. “Trade finance is countercyclical to the overall economy in that during the financial crisis, trade finance was in high demand and corporates more frequently required letters of credit. As the global economy stabilises, the appetite for trade finance has decreased and there has been less of a focus on trade finance within the banking sector.” That said, while Citi’s customers are relying less on LCs for international purchases, the bank is seeing increased usage of LCs for export sales, as well as documentary collections for both imports and exports.
West coast businesses face additional costs toother US SMEs because of longer sales cycle and increased transportation time for their goods being shipped from the west coast to destinations throughout the globe. FirmGreen’s Wilburn is now exploring opportunities in Africa, Mexico and the Phillippines. “We are developing our trade with Sub-Saharan Africa particularly to capitalise on the massive push for energy infrastructure there,” he says.