oversight

Export Finance: Federal Efforts to Support Working Capital Needs of Small Business

Published by the Government Accountability Office on 1997-02-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Requesters




February 1997
                  EXPORT FINANCE
                  Federal Efforts to
                  Support Working
                  Capital Needs of Small
                  Business




GAO/NSIAD-97-20
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             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.


             According to the Trade Promotion Coordinating Committee (TPCC),1 one of
Background   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


             1
              TPCC is an interagency group responsible for developing and coordinating U.S. export promotion
             programs.



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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.




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).



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                   Eximbank and SBA have programs that provide guarantees to facilitate
Results in Brief   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.

                   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.



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                             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.


                             Eximbank and SBA emphasize different delivery approaches for facilitating
Eximbank, SBA, and           their programs. Eximbank relies on its U.S. Division and network of
States Use Various           delegated authority lenders, whereas SBA relies primarily on staff with
Delivery Approaches          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      Eximbank’s U.S. Division, staffed with six loan officers and one vice
on Delegating Authority to   president, has primary responsibility for administering the Working
Lenders                      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:




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                       •   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.


SBA Relies on USEACs       Although SBA’s Office of International Trade is responsible for overseeing
and District Offices       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

                           7
                            Eximbank’s regional offices are located in Chicago, Houston, Long Beach, Miami, and New York.



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    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


    8
     These agreements are separate from SBA’s packaging intermediaries for its domestic programs.
    9
     This program is separate from SBA’s Preferred Lender Program for its domestic programs.
    10
      Although the guarantee rate for Eximbank’s program has been 90 percent, the guarantee rate for
    SBA’s Preferred Lender Program was 70 percent during fiscal year 1995 and legislatively mandated at
    75 percent during fiscal year 1996. According to SBA, its lower guarantee rate was not as attractive to
    lenders that could obtain a 90-percent rate from Eximbank. As of fiscal year 1997, SBA’s guarantee rate
    has been legislatively restored to 90 percent for its entire Export Working Capital Program.



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                                        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.


Eight State Programs                    We surveyed 24 states and 1 U.S. territory initially identified as having
Identified as Providing                 export finance programs and found 8 states that provide export working
Working Capital                         capital guarantees for SMEs.11 The eight state programs were designed
                                        specifically to service small businesses. As shown in table 1, these state
Guarantees                              programs varied greatly in their level of staff resources, available funding
                                        for guarantees, and program activity.

Table 1: Staff Resources, Available
Funding, and Loans Guaranteed for       Dollars in thousands
States Identified With Export Working                                       Number of          Leveraged         Number of          Value of
Capital Guarantee Funds for Fiscal                                                staff          funding             loans             loans
Year 1996                               State                               resourcesa             levelb       guaranteed        guaranteed
                                        California                                    12          $38,908                  91         $39,498
                                        Maryland                                       3            50,000c                15           15,900
                                        Massachusetts                                  1            30,000                  2            1,000
                                        Florida                                        4            20,000                 25            3,588d
                                        Minnesota                                      3             3,674                 10            1,550
                                        Kansas                                         1             2,300                  6            2,542
                                        Georgia                                        2             2,000                  1                 55
                                        South Carolina                                 1               850                  0                  0
                                        a
                                            The number of staff resources does not necessarily represent full-time equivalents.
                                        b
                                         The leveraged funding level is calculated by multiplying the allocated funding level by the
                                        number of times the fund may be leveraged. This amount represents the maximum amount of
                                        guarantees that may be outstanding at any one time.
                                        c
                                            This fund is available for domestic loans as well as export loan guarantees.
                                        d
                                          This amount represents the state’s total liability associated with the 25 loans guaranteed during
                                        fiscal year 1996.



                                        In addition, our survey identified programs in nine states and the one U.S.
                                        territory that provided export finance assistance to small companies but
                                        did not offer export-related working capital guarantees. Services provided
                                        by these programs included export finance counseling; loan packaging for
                                        Eximbank; and referrals to Eximbank, SBA, or lenders. The remaining


                                        11
                                         We used the National Association of State Development Agencies’ state export program data as well
                                        as information from Eximbank and SBA to identify states with export finance programs.



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                        seven states surveyed did not have export finance programs. (See app. II
                        for additional information on state-level export finance programs.)


                        Eximbank and SBA have made progress harmonizing their export working
Harmonization Efforts   capital programs. The agencies’ efforts to harmonize and, in other ways,
Are Incomplete but      improve their programs appear to have increased the level of loans
Appear Beneficial       guaranteed and the extent of exporter and lender participation. However,
                        the programs continue to have some differences. Furthermore, progress
                        toward harmonization was affected by a reduction in SBA’s guarantee rate
                        effective during fiscal year 1996. Despite remaining program differences
                        and the temporary reduction in SBA’s guarantee rate, both SBA and
                        Eximbank have been able to continue bringing new exporters and, to a
                        lesser degree, new lenders into their programs.


Efforts to Harmonize    In response to TPCC’s recommendations, Eximbank and SBA began
                        harmonizing their export working capital programs in October 1994 to
                        simplify the loan process and make the programs more consistent for
                        exporters and lenders. They standardized such key features as the
                        application forms used by lenders or exporters, application fees, and
                        guarantee coverage. To standardize the guarantee coverage, Eximbank
                        reduced its coverage from 100 percent of principal and interest to
                        90 percent, and SBA raised its 85-percent guarantee to 90 percent. Both
                        agencies also streamlined their procedures for processing loan guarantees.
                        Additionally, they agreed to a market segmentation plan that (1) assigned
                        SBA primary responsibility for assisting small businesses whose export
                        working capital needs do not exceed SBA’s $750,000 exposure limit and
                        (2) made Eximbank responsible for assisting exporters who do not fall
                        within SBA’s small business standards or whose transactions exceed SBA’s
                        limit.

                        The effects of harmonization-related changes are difficult to measure
                        because many occurred when Eximbank and SBA were making other
                        changes aimed at improving export finance assistance for small
                        businesses. For example, in fiscal year 1995, SBA began to set export
                        working capital goals for each of its 69 district offices, and it developed
                        new coguarantee agreements with a few states. SBA also provided basic
                        export finance training to almost 300 of its staff and resource partners
                        (e.g., small business development centers) and more in-depth training on
                        transaction lending to its trade finance specialists. Likewise, during the
                        same period, Eximbank enhanced its Delegated Authority Program by



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                     increasing the limits on the aggregate amounts participating lenders can
                     provide to single borrowers annually12 and allowing lenders to retain all or
                     part of a loan fee, depending on the amount of the loan. Together,
                     Eximbank and SBA officials also conducted export finance seminars in 13
                     cities that were attended by about 1,300 bankers. In addition, the agencies
                     worked with the Department of Commerce to expand the USEAC network.

                     These program changes, including those related to the agencies’
                     harmonization efforts, appear to have helped expand the use of the
                     program, improve SME access to working capital, and increase the number
                     of lenders participating in export financing. During fiscal year 1995, the
                     number of export working capital loans guaranteed by SBA increased
                     167 percent, from 71 loans totaling $24 million in fiscal year 1994 to
                     190 loans totaling $69 million in fiscal year 1995. The number of export
                     working capital loans guaranteed by Eximbank increased from 116 loans
                     valued at about $152 million to 179 loans valued at almost $302 million, a
                     54-percent increase.

                     Our analysis of agency data showed that the two programs helped an
                     increased number of new exporters during the period of harmonization
                     and key program improvements. SBA’s Export Working Capital Program
                     assisted 69 exporters in fiscal year 1994 and 160 new exporters in fiscal
                     year 1995. Eximbank’s Working Capital Guarantee Program assisted
                     110 exporters in fiscal year 1994 and 133 new exporters in fiscal
                     year 1995.

                     Lender participation in both of these programs also increased from 1994 to
                     1995. In fiscal year 1994, 56 lenders provided financing under SBA’s Export
                     Working Capital Program. In fiscal year 1995, 107 new lenders participated
                     in the program. For Eximbank, 79 lenders provided financing under its
                     Working Capital Guarantee Program in fiscal year 1994; 50 new lenders
                     participated in the program in fiscal year 1995.


Programs Not Fully   Although harmonization and other program improvements have produced
Harmonized           some positive results, Eximbank’s and SBA’s programs are still not fully
                     harmonized, as recommended by TPCC.13 TPCC suggested standardizing the
                     underwriting standards; however, there is a difference in the two agencies’


                     12
                       For example, lenders who had successfully originated four working capital loans were provided with
                     a limit of $2 million per exporter annually and an aggregate limit of up to $25 million in loans annually.
                     13
                       Some remaining differences are statutory in nature, such as those related to Eximbank’s U.S. content
                     requirements and restrictions on supporting the sale of military or defense-related items.



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credit qualification requirements. Eximbank requires borrowers to have a
positive net worth; SBA does not. An Eximbank official stated that the
agency has the flexibility to waive this requirement for otherwise
creditworthy borrowers but could recall only a few instances in which this
was done.

ProAction Agency, the consultant commissioned by Eximbank and SBA to
evaluate harmonization efforts, identified another key difference between
Eximbank’s and SBA’s programs; Eximbank and SBA fees for processing
guarantees are not standardized. For loans with a term of greater than 6
but not more than 12 months, Eximbank charged 1.5 percent of the loan
amount, and for loans of 6 months or less, it charged 0.75 percent of the
loan amount.14 SBA charged a fee of 0.25 percent of the guaranteed amount
for loans with a term of 12 months or less. ProAction Agency also
identified some remaining differences in Eximbank’s and SBA’s efforts to
harmonize program documentation and operational procedures.

ProAction Agency concluded that because of the vast differences between
the two agencies’ programs, harmonization could not have been
reasonably completed within the recommended 12-month time frame.15 It
further noted, however, that the lack of program standardization created a
larger burden on lenders and exporters in the form of increased
paperwork, high turnaround time, and general confusion regarding
expectations. During fiscal year 1996, no other features of the two export
working capital programs were standardized. SBA commented that, during
fiscal year 1997, it and Eximbank have been working together to identify
ways to further harmonize the closing documents for their export working
capital loans.

Furthermore, progress toward harmonization of the two agencies’
programs was interrupted during fiscal year 1996 when the guarantee
coverage of SBA’s 7(a) program was reduced in accordance with the Small
Business Lending Enhancement Act of 1995 (P.L. 104-36, Sec. 2, Oct. 12,
1995). While Eximbank’s guarantee coverage remained at 90 percent, SBA’s
coverage was reduced to 75 percent for loans above $100,000 and to
80 percent for loans below that level. In a report to Congress, SBA
characterized this change as a severe setback to harmonization that
caused confusion among the lending and small business exporting

14
  Under Eximbank’s Delegated Authority Program, the agency allows lenders to retain all or part of the
loan fee, depending on the loan amount and term.
15
  Since TPCC recommended that the harmonization plan be evaluated 1 year after its effective date,
the scope of ProAction Agency’s review was limited to the end of fiscal year 1995.



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communities.16 SBA officials believe that this setback caused the agency to
lose the momentum that allowed it to almost triple (from 71 to 190) the
number of loans it guaranteed in fiscal year 1995. An Eximbank official
emphasized that a common guarantee rate was an important element of
harmonization and predicted that SBA’s reduced rate would negatively
affect small business exporters who need the localized support and
assistance of SBA and its lenders.

Notwithstanding the reduction in SBA’s guarantee rate, SBA increased the
number of export working capital loans guaranteed by 38 percent for fiscal
year 1996. Eximbank increased the number of loans guaranteed by
56 percent. The value of loans guaranteed under each of the agencies’
programs likewise increased by almost 38 percent. Figure 1 shows the
number of loans guaranteed by both agencies between fiscal years 1991
and 1996.




16
 Report to the Congress on the Impact of the Reduced Maximum Guarantee Percentage for the U.S.
Small Business Administration’s Export Working Capital Program, SBA, February 1996.



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Figure 1: Export Working Capital Loans Guaranteed by Eximbank and SBA (fiscal years 1991-96)

Number of loans guaranteed
300
280
260
240
220
200
180
160
140
120
100
 80
 60
 40
 20
  0
      1991         1992          1993                 1994              1995                1996
                                        Fiscal year

                                    Eximbank SBA




                                           Source: GAO.




                                           In addition to increasing the number and value of loans guaranteed during
                                           fiscal year 1996, Eximbank and SBA have continued to enlist new exporters
                                           at generally the same rate as in the prior year. The number of new lenders
                                           funding loans through the export working capital programs, however,
                                           declined for both agencies in 1996, as shown in table 2. Effective
                                           October 1, 1996, SBA was provided authority to restore its guarantee
                                           coverage to 90 percent for its Export Working Capital Program, pursuant
                                           to the Omnibus Consolidated Appropriations Bill for fiscal year 1997
                                           (P.L. 104-208, Sept. 30, 1996).17




                                           17
                                             See H.R. Conf. Rep. No. 104-863, Division D, Title I, sec. 111.



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Table 2: Number of New Lenders
Funding Loans and New Exporters                                                                           Fiscal year Fiscal year
Receiving Loans                                                                                                 1995       1996a
                                  SBA
                                       New lenders funding loans                                                 107          73
                                       New exporters receiving loans                                             160         133
                                  Eximbank
                                       New lenders funding loans                                                  50          30
                                       New exporters receiving loans                                             133         120
                                  Total new lenders funding loans                                                157         103
                                  Total new exporters receiving loans                                            293         253
                                  a
                                      Data for fiscal year 1996 cover October 1995 through July 1996.

                                  Source: GAO.




                                  To facilitate small business export finance, Eximbank and SBA have
Issues Associated                 established more cooperative agreements with both the private and public
With Expanding the                sectors. Delegating authority to private sector lenders and devolving
Use of Cooperative                certain program responsibilities to state export finance organizations are
                                  examples of cooperative agreements. Expanding the use of these
Agreements                        approaches could further leverage federal resources and expand federal
                                  outreach to SMEs, but it would also shift more responsibility for the
                                  guarantee of funds from the federal government to the private sector and
                                  the states. Nevertheless, Eximbank and SBA remain responsible for
                                  ensuring that the programs are well managed, funds are properly spent,
                                  and program objectives are met.


Delegating Authority to           Eximbank’s Delegated Authority Program exemplifies one cooperative
Lenders                           approach to increasing SME access to export financing. Under the program,
                                  exporters can have working capital guarantees processed and approved by
                                  a network of 69 delegated authority lenders located in 25 states plus the
                                  District of Columbia, rather than having to go through Eximbank’s
                                  Washington, D.C., office. This program has also allowed Eximbank to
                                  leverage its resources and increase lender participation.

                                  The Delegated Authority Program enabled the U.S. Division’s staff to
                                  handle an increasing number of working capital guarantees while
                                  maintaining the same level of staffing. For example, in 1994, no loans were
                                  processed under the Delegated Authority Program, but in fiscal year 1995,




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Eximbank’s delegated authority lenders processed 99 loans valued at
$115 million, without an increase in the U.S. Division’s staff. This activity
represented 55 percent of Eximbank’s working capital guarantee program.
During fiscal year 1996, the delegated authority lenders processed
69 percent of the agency’s working capital guarantees. This activity
represented 192 loans valued at about $227 million. U.S. Division officials
estimated that, even though the Delegated Authority Program allowed
them to leverage their resources, about 20 to 30 percent of staff time was
spent administering and monitoring the program.

The Delegated Authority Program also appears to have increased the level
of lender participation. In fiscal year 1995, 29 active delegated authority
lenders funded, on average, over twice as many loans using delegated
authority than they did the prior year, when the program was dormant.
According to Eximbank officials, lenders’ ability to provide guarantees
without obtaining prior approval coupled with fiscal year 1995 program
enhancements contributed to the increased level of lender participation in
the program. These enhancements included, for example, lenders’ ability
to retain all or part of a loan fee. Over 74 percent of the 56 respondents to
our Delegated Authority Program survey18 confirmed that quicker
processing time attributable to the lenders’ ability to approve loan
guarantees, fee incentives, and the 90-percent guarantee coverage were
the most important factors for remaining enrolled in the program.

Because more than two-thirds of Eximbank’s export working capital loans
are handled through the Delegated Authority Program, monitoring lenders’
compliance with program requirements and managing the associated level
of risks of these loan guarantees have become increasingly important.
Eximbank developed a new monitoring system that requires inspections of
all delegated authority lenders that have made at least one transaction
under the program. According to Eximbank officials, these inspections
assess lenders’ compliance with various program requirements, including
repayment terms, reviews of creditworthiness, and maintenance of loan
transaction documentation. If Eximbank identifies compliance problems,
it can place the lender on probation or retract the lender’s delegated
authority status. Eximbank officials said that possible loss of eligibility is
one of the most effective measures for ensuring a lender’s compliance.
Another measure is the 10-percent risk assumed by the bank in the event
of loan defaults. As of June 1996, the default rate for exporters whose
loans were guaranteed through the Delegated Authority Program in fiscal

18
 We surveyed all 67 lenders that were enrolled in Eximbank’s Delegated Authority Program as of
February 1996.



Page 14                                                        GAO/NSIAD-97-20 Export Finance
                            B-275002




                            year 1995 was 1 default out of 99 loans, and the default rate for loans
                            guaranteed through Eximbank headquarters was 3 defaults out of 80 loans.


Devolving Greater           In 1993, TPCC recognized the merits of expanding the use of cooperative
Program Responsibility to   arrangements with states when it endorsed cofinancing agreements as part
the State Level             of an overall government strategy to facilitate export promotion and
                            financing. Under these agreements, federal programs can expand their
                            outreach to SMEs by taking advantage of the states’ proximity to target
                            firms and their knowledge of local businesses. Also, all 17 states and the
                            1 U.S. territory with export finance programs that were surveyed indicated
                            their programs were designed to serve smaller companies. Likewise, states
                            benefit from cooperative agreements by gaining access to federal
                            guarantee funds that complement their own funds.

                            However, key limitations to expanding such agreements are (1) legal
                            prohibitions at the state level and (2) varying levels of state commitment
                            to export finance assistance. Moreover, these types of arrangements
                            require provisions or mechanisms to ensure that federal guarantee funds
                            are appropriately committed. Legal prohibitions sometimes prevent states
                            from offering state-backed guarantees. Constitutions for six states prohibit
                            them from providing export finance assistance, according to a report by
                            the National Association of State Development Agencies.19 States may also
                            vary in their level of commitment to export financing, depending on the
                            policy priorities of the states’ current administration. A state program
                            administrator said maintaining a consistent level of commitment to a
                            particular program can be difficult because states have limited funds and a
                            large number of competing demands. In some states, the level of funding
                            available to support export financing has changed from year to year. In
                            Maryland, for example, the leveraged guarantee funding was reduced from
                            $60 million in fiscal year 1995 to $50 million in fiscal year 1996 because of
                            a shift in the state’s program priorities. In Texas, the leveraged funding
                            was reduced from $2 million in fiscal year 1995 to no funding in fiscal
                            year 1996.20

                            Eximbank established partnerships with state and local government
                            offices and private organizations to help market its small business
                            financial products. In September 1996, it implemented a pilot program

                            19
                             State Export Program Data Base Analysis, National Association of State Development Agencies,
                            1994.
                            20
                             A state program administrator explained that the state’s legislation did not authorize the program to
                            use any funds and thus no guarantees were made during fiscal year 1996.



                            Page 15                                                          GAO/NSIAD-97-20 Export Finance
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delegating authority for approving working capital guarantees to six of the
agency’s state partners. Eximbank requires participating states to have an
active export guarantee program with an average loan-loss track record of
5 percent or less, an independent credit approval process, and at least one
person within the office or organization who has completed Eximbank’s
City/State Program training requirements.

Under pilot program guidelines, the maximum Eximbank guarantee will
not exceed the legislative limit of the respective state partner, and
Eximbank’s maximum aggregate liability on principal will be $10 million
per state partner. The state, Eximbank, and the lender will be partners in
each guarantee, sharing all risks or losses or recovered amounts on a
proportional basis.21 Matching fund requirements and risk-sharing
provisions are intended to promote accountability, and Eximbank officials
believe they encourage state partners to ensure that federal funds are
appropriately committed. Transactions under this program are also
expected to conform with Delegated Authority Program guidelines and
documentation requirements. As with delegated authority lenders, state
partners are to be subject to periodic field inspections by Eximbank staff.

SBA  has developed separate coguarantee arrangements with three states,
as discussed earlier. It relies on risk-sharing program features,
documentation requirements, and its final approval authority to ensure
that states exercise due diligence and comply with coguarantee
arrangements. Although SBA does not have formal eligibility requirements
for developing coguarantee arrangements with states, agency officials
emphasized that they tailor the agreements to the individual state
programs. For example, SBA’s agreement with California provides for a
50/50 matching guarantee for 90 percent of the principal of working capital
loans. Guarantees under this agreement are not to exceed $1.5 million, or
up to $750,000 per agency per guarantee, the maximum amount that
California can guarantee. According to the director of the California
program, the state conducts its loan analysis and completes its forms as
usual and then sends the loan guarantee package to SBA trade finance
specialists located at the USEAC in Long Beach for approval. SBA officials
explained that they have not developed a separate monitoring system for
overseeing its coguarantee agreements with the states because the agency
still retains final review and approval authority for SBA’s portion of the loan
guarantee.



21
 Specifically, the risk is to be shared as follows: 45 percent for the city/state partner, 45 percent for
Eximbank, and 10 percent for the commercial lender.



Page 16                                                             GAO/NSIAD-97-20 Export Finance
                            B-275002




                            In 1993, TPCC recommended that SBA’s Export Working Capital Program
Potential Implications      should be merged into Eximbank’s program if the agency’s harmonization
of Transferring SBA’s       efforts were unsatisfactory. Although Eximbank and SBA have made
Export Working              progress in harmonizing their programs, a number of factors would need
                            to be considered before any such transfer occurred. For example,
Capital Program to          Eximbank’s program may not serve some exporters currently served by
Eximbank                    SBA since its delegated authority lenders may not handle the smaller export
                            transactions SBA does. Other exporters may not have easy access to
                            Eximbank’s U.S. Division and its network of delegated authority lenders,
                            which are located in only 25 states plus the District of Columbia and tend
                            to be clustered around large metropolitan areas. Likewise, some SBA
                            lenders currently served by SBA may lose the benefit of being introduced to
                            the program and becoming involved in export financing, since Eximbank
                            and SBA tend to encourage greater lender participation in differing ways
                            and reach out to different types of lenders. Finally, consolidating the
                            programs may result in minimal cost savings, according to SBA’s cost
                            estimates for administering its Export Working Capital Program.


Delegated Authority         We sought to determine whether Eximbank’s lenders would be willing to
Lenders May Not Serve the   provide the same level of support for smaller export transactions that SBA
Needs of Exporters Served   lenders provide. In accordance with the market segmentation plan under
                            harmonization, SBA was to handle applications for loans that were less
by SBA                      than or equal to $833,333 and Eximbank was responsible for handling
                            working capital loans over $833,333. However, Eximbank’s delegated
                            authority lenders were not covered by the market segmentation plan and
                            were allowed to handle smaller export working capital loans.22 Therefore,
                            we focused our analysis on the delegated authority lenders. During fiscal
                            years 1995 and 1996, only 24 percent of the loans guaranteed through
                            Eximbank’s Delegated Authority Program were valued at less than
                            $500,00023 and about 70 percent of the export working capital loans
                            guaranteed by SBA were valued at less than $500,000, as shown in figure 2.




                            22
                             Before the market segmentation plan, Eximbank’s Working Capital Guarantee Program had been
                            available for loans of any size. In fiscal year 1995, when the market segmentation plan became
                            effective, Eximbank was to handle working capital guarantee applications for loans over $833,333.
                            When SBA’s guarantee rate was lowered in fiscal year 1996, Eximbank returned to its practice of
                            guaranteeing loans of any size. As of October 1, 1996, SBA’s guarantee rate was restored. According to
                            an Eximbank official, the agency has resumed guaranteeing loans that are consistent with the market
                            segmentation plan.
                            23
                              According to Eximbank data, 10 percent of the loans guaranteed under Eximbank’s U.S. Division in
                            fiscal year 1995 were valued at less than $500,000 (13 percent in 1996).



                            Page 17                                                          GAO/NSIAD-97-20 Export Finance
                                          B-275002




Figure 2: Export Working Capital Loans Guaranteed by Dollar Value (fiscal years 1995 and 1996)
Number of loans
200

                                                                                                                57%
150                                                  30.8%


                                  22.8%
100
                  16.6%                                                       16.6%

 50                       13.7%                                   14.4%
                                               10%                                                 7.5%
                                                                                                                         5.5%
                                                                                          4.5%
         0.3%
  0
            < $100        $100 to $249         $250 to $499        $500 to $749          $750 to $833               > $833
                                                   Dollar value (in thousands)

                                                Eximbank                         SBA
                                                Delegated Authority Program




                                          Source: GAO.




                                          In our survey of delegated authority lenders, over 80 percent (46 of 56) of
                                          the respondents indicated that they would be willing to provide export
                                          working capital loans for less than $833,333 to existing customers, and
                                          62 percent (35 of 56) indicated they would be willing to provide such loans
                                          for new customers. However, 66 percent of the respondents indicated that
                                          they would probably not provide a working capital loan under a certain
                                          threshold, which for these lenders was a median threshold of $250,000.24
                                          During fiscal years 1995 and 1996, 14 percent of the export working capital
                                          loans guaranteed through delegated authority lenders were less than
                                          $250,000 compared with about 40 percent of the loans guaranteed by SBA.

                                          24
                                            In its October 1996 report to Congress, TPCC recognized the reluctance of banks to handle the
                                          smaller loans, particularly for export financing. It reported that a major problem facing small exporters
                                          was limited access to export finance due to the small number of banks (75 out of 9,000) that provide
                                          this type of financing. Moreover, most of these 75 banks are larger institutions that typically do not
                                          provide banking services to SMEs.



                                          Page 18                                                           GAO/NSIAD-97-20 Export Finance
                            B-275002




                            More than half of the delegated authority lenders indicating they had a
                            threshold stated that processing loans below that amount was too costly
                            and time-consuming for them to make a profit. In response to follow-up
                            contacts, six of seven delegated authority lenders who were generally
                            willing to provide smaller working capital loans agreed such loans were
                            largely unprofitable for their institutions.25 They were willing to provide
                            small working capital loans chiefly to develop new business opportunities
                            with exporters or maintain their existing customer base.

                            Over 60 percent of the respondents indicated that certain incentives would
                            be effective in encouraging them to provide working capital loans under
                            $833,333. These incentives included changes to Eximbank’s program, such
                            as allowing lenders to retain a greater portion of the facility fee and further
                            relaxing collateral requirements. Other changes were outside the scope of
                            the Delegated Authority Program, including allowing lenders to receive
                            credit for promoting small business export finance through the
                            Community Reinvestment Act and relaxing loan loss reserve requirements.
                            About 32 percent of the respondents suggested simplifying the paperwork
                            and loan processing requirements of Eximbank’s program or increasing
                            the guarantee to 100 percent for smaller loans.


Eximbank’s Program May      If SBA’s Export Working Capital Program were transferred to Eximbank,
Not Be Accessible to Some   SMEs in some states might not have convenient access to the current

Exporters                   lenders who participate in Eximbank’s Delegated Authority Program.
                            Eximbank’s U.S. Division is located in Washington, D.C., and its 69
                            delegated authority lenders located in 25 states plus the District of
                            Columbia tend to be concentrated in large metropolitan areas. In contrast,
                            USEACs and SBA’s district offices cover all 50 states and Puerto Rico.
                            Although Eximbank’s delegated authority lenders are in fewer states than
                            USEACs and SBA’s district offices, Eximbank may be able to reach these
                            businesses in other ways, such as its City/State Program. Eximbank’s pilot
                            programs, which began in September 1996, are intended to increase the
                            activity level of these local partners.

                            Some SMEs currently served by SBA may not have access to Eximbank’s
                            Working Capital Guarantee Program because of statutory restrictions on
                            the types of loans Eximbank can guarantee and a difference in Eximbank’s
                            and SBA’s credit qualification requirements. For example, Eximbank is
                            prohibited from financing defense articles and services and is restricted in

                            25
                              We selected seven of the survey respondents because they had issued guarantees for and funded at
                            least three export working capital loans under $833,333 as of February 28, 1996.



                            Page 19                                                        GAO/NSIAD-97-20 Export Finance
                            B-275002




                            the amount it can guarantee for products that have less than 50 percent
                            U.S. content. Eximbank’s seemingly stricter credit standards may also
                            affect small exporters served by SBA.


Transferring Program        Eximbank and SBA use different methods to increase lender participation
Responsibility May Affect   and focus on different types of lenders. If SBA’s Export Working Capital
Outreach to Some Lenders    Program were transferred to Eximbank, outreach to some lenders that are
                            currently part of SBA’s network of 7(a) lenders may be adversely affected
                            as a result of these differences.

                            SBA focuses on attracting new banks to its export program from its pool of
                            domestic 7(a) program lenders, whereas Eximbank focuses more on
                            increasing the level of loans funded by its existing lenders. Eximbank also
                            focuses on attracting new lenders to its program but not to the same
                            extent as SBA. During fiscal year 1995 and the first 10 months of fiscal year
                            1996, SBA attracted 180 new lenders to its Export Working Capital
                            Program, whereas Eximbank attracted 80 new lenders. Although
                            Eximbank had fewer new lenders, it increased the number of loans
                            guaranteed by increasing participation in its Delegated Authority Program.

                            The lenders in SBA’s program tend to have different profiles than those in
                            Eximbank’s program. SBA officials said they generally work with small
                            community banks without international divisions and provide one-on-one
                            assistance with processing export working capital loans. They also
                            explained that the agency works with larger banks’ small business or
                            credit departments, which typically lack experience in export financing.
                            Although some of these larger banks may have international divisions,
                            these divisions are generally not inclined to handle the less profitable
                            smaller transactions. Eximbank tends to work with large banks, many
                            with international departments that can assume delegated authority.

                            In addition, Eximbank and SBA tend to work with banks of different asset
                            sizes. For example, over 70 percent of the banks Eximbank works with
                            have assets greater than $1 billion.26 On the other hand, almost 53 percent
                            of SBA’s Export Working Capital Program lenders have less than $1 billion
                            in assets, with 16 percent having assets less than $100 million. (See app. III
                            for summary data on the assets of SBA’s Export Working Capital Program
                            lenders and Eximbank’s delegated authority lenders.)



                            26
                             Asset size data is as of March 30, 1996, except for banks that merged before this date. For merged
                            banks, we used the most recent asset size data available before merger.



                            Page 20                                                          GAO/NSIAD-97-20 Export Finance
                          B-275002




                          Some SBA lenders were aware of Eximbank’s Working Capital Guarantee
                          Program but did not use the program for a variety of reasons. In our
                          survey of the more active SBA lenders,27 25 of 28 respondents were aware
                          of Eximbank’s program, but less than half used it. Five respondents did
                          not use Eximbank’s program because they were satisfied with SBA’s
                          program, three respondents believed Eximbank’s program was intended
                          for larger export transactions, and two said the program was too
                          bureaucratic.


Cost Savings Associated   The potential savings associated with transferring the program from SBA to
With Transferring SBA’s   Eximbank may be modest, given the relatively low estimated costs of
Program May Not Be        administering SBA’s Export Working Capital Program. Furthermore,
                          Eximbank might incur increased costs from hiring additional loan officers
Significant               to handle the new workload. On the other hand, some of these costs could
                          be mitigated by approving more working capital loan guarantees through
                          the Delegated Authority Program or devolving authority to approve
                          guarantees to more states. SBA estimated it cost $460,000 to administer its
                          Export Working Capital Program in fiscal year 1995. Under the program,
                          SBA guaranteed 190 export working capital loans, which resulted in a
                          potential liability of about $57 million. SBA’s estimates for administering
                          the Export Working Capital Program include costs related to staffing and
                          supporting USEACs. Although these estimates do not include the time or
                          costs of the agency’s district office staff involved in handling export
                          working capital guarantees, they represent the bulk of the agency’s
                          administrative costs for the program, according to an SBA official.


                          SBA and Eximbank provided us with written comments on a draft of this
Agency Comments           report. (See apps. V and VI.) SBA did not offer any overall comments on the
and Our Evaluation        draft but provided specific technical suggestions and observations to
                          improve the clarity and accuracy of the draft. We have incorporated these
                          changes in the report where appropriate.

                          Eximbank generally agreed with the report. However, it disagreed with
                          our observation that small businesses may have less access to export
                          working capital if SBA’s program were transferred to Eximbank. Eximbank
                          stated that its delegated authority lenders had greatly expanded the
                          availability of its program to small businesses. Although the Delegated
                          Authority Program has enabled Eximbank to greatly expand its program

                          27
                           We surveyed all 35 lenders that had funded at least 2 export working capital loans guaranteed by SBA
                          during fiscal year 1995.



                          Page 21                                                         GAO/NSIAD-97-20 Export Finance
              B-275002




              without increasing its staff, our review also identified a significant
              limitation that exporters may face if they must seek smaller working
              capital loans from delegated authority lenders. Our analysis of Eximbank
              data showed that, for fiscal years 1995 and 1996, only about 24 percent of
              the loans guaranteed through Eximbank’s delegated authority lenders
              were under $500,000. On the other hand, about 70 percent of the export
              working capital loans guaranteed by SBA were valued at less than $500,000.


              To understand federal and state approaches to facilitating export working
Scope and     capital to SMEs, we interviewed Eximbank and SBA officials and reviewed
Methodology   pertinent agency documents, such as working capital program
              instructions, summary activity reports, and related press releases. We also
              reviewed Eximbank and SBA documents on various arrangements aimed at
              facilitating export working capital guarantees, such as the Eximbank
              Delegated Authority Program, the Eximbank City/State Program, SBA
              coguarantee arrangements with states, and SBA agreements with
              intermediaries to package export working capital loans. To determine
              state efforts to facilitate export working capital for SMEs, we reviewed the
              National Association of State Development Agencies’ 1994 State Export
              Program Data (the latest comprehensive information on state’s programs
              available at the time of our review) as well as information from Eximbank
              and SBA. We identified 21 states and 1 U.S. territory using the National
              Association of State Development Agencies’ data and identified an
              additional 3 states as having export finance programs. We then surveyed
              and received responses from representatives at each of the 24 states and
              the 1 U.S. territory.

              To assess efforts to harmonize Eximbank and SBA’s export working capital
              programs, we interviewed officials responsible for administering each
              agency’s program and reviewed available program documents, such as
              operating guidelines and sample guarantee agreements. We also reviewed
              a consultant report, cosponsored by both agencies, aimed at evaluating the
              success of harmonization efforts.28 To identify whether harmonization
              efforts may have affected the level of program activity, we analyzed
              Eximbank and SBA data on the number and dollar value of loans
              guaranteed during fiscal years 1994 through 1996 as well as data on the
              number of lenders and exporters participating in the working capital
              guarantee programs. Data presented in the report on the number and value
              of loans guaranteed exclude those cases in which a guarantee was

              28
               Harmonization of Ex-Im Bank Working Capital Guarantee Program and SBA Export Working Capital
              Program, Evaluation Study, ProAction Agency, May 20, 1996.



              Page 22                                                    GAO/NSIAD-97-20 Export Finance
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approved but was subsequently withdrawn or canceled. To identify the
number of new lenders and new exporters, we compared agency data for
fiscal years 1994 through 1996. New lenders or exporters for fiscal year
1995 were those that did not participate in the programs in fiscal year 1994
(before harmonization). New lenders or exporters for fiscal year 1996
were those that did not participate in the programs in the preceding 2
years. We did not independently verify the accuracy of the data provided
by Eximbank or SBA.

To identify the issues associated with expanding the number of
cooperative agreements in the federal working capital guarantee
programs, we focused on delegating authority to lenders and devolving
greater responsibility for export working capital programs to the states.
We evaluated these approaches on the basis of leveraging federal
resources, SME access to export financing, and program oversight. We also
examined the potential implications of transferring SBA’s export working
capital program to Eximbank by focusing on SME access to export
financing and lender participation. We discussed these approaches with
Eximbank, SBA, and Department of Commerce officials as well as with
officials of financial institutions and small business trade associations,
such as the Bankers Association of Foreign Trade, Small Business
Exporters Association, and the National Small Business United.

To obtain lenders’ perspectives on expanding the use of cooperative
agreements with banks, we surveyed the 67 lenders that were enrolled in
Eximbank’s Delegated Authority Program as of February 1996 and had
about an 85-percent response rate. We also surveyed all lenders that had
funded at least 2 export working capital loans guaranteed by SBA during
fiscal year 1995 (35 out of 150 lenders) and had an 80-percent response
rate. (See app. IV for more details on the methodology for and selected
results of the two lender surveys.) We obtained information on the costs
associated with administering the export working capital programs to
determine potential cost savings that may be derived from transferring
SBA’s program to Eximbank. Since agency budget and cost data was not
maintained by specific program areas, we relied on estimates provided by
both Eximbank and SBA.

We did our work from February to October 1996 in accordance with
generally accepted government auditing standards.




Page 23                                         GAO/NSIAD-97-20 Export Finance
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We are sending copies of this report to appropriate congressional
committees, the Administrator of the Small Business Administration, the
Chairman of the U.S. Export-Import Bank, and the Chairman of the Trade
Promotion Coordinating Committee. We will also make copies available to
others on request.

This report was prepared under the direction of JayEtta Z. Hecker,
Associate Director, who may be reached on (202)512-8984 if you or your
staff have any questions about this report. Other major contributors to this
report are listed in appendix VII.




Benjamin F. Nelson
Director, International Relations and Trade Issues




Page 24                                         GAO/NSIAD-97-20 Export Finance
Page 25   GAO/NSIAD-97-20 Export Finance
Contents



Letter                                                                                            1


Appendix I                                                                                       28

Main Components for
Delivering Export
Working Capital
Programs to Small-
and Medium-Sized
Enterprises
Appendix II                                                                                      30

Information on
State-Level Export
Finance Programs
Appendix III                                                                                     34

Lenders Participating
in Eximbank’s and
SBA’s Export Working
Capital Programs
Appendix IV                                                                                      35
                        Survey of Eximbank Delegated Authority Lenders                           35
Methodology for and     Survey of Lenders Participating in SBA’s Export Working Capital          38
Selected Results of       Program
Lender Surveys
Appendix V                                                                                       41

Comments From the
Small Business
Administration




                        Page 26                                       GAO/NSIAD-97-20 Export Finance
                        Contents




Appendix VI                                                                                      45

Comments From the
U.S. Export-Import
Bank
Appendix VII                                                                                     53

Major Contributors to
This Report
Tables                  Table 1: Staff Resources, Available Funding, and Loans                    7
                          Guaranteed for States Identified With Export Working Capital
                          Guarantee Funds for Fiscal Year 1996
                        Table 2: Number of New Lenders Funding Loans and New                     13
                          Exporters Receiving Loans
                        Table II.1: States Surveyed With an Export Finance Program or            30
                          Export Working Capital Guarantee Funds
                        Table II.2: Leveraged Guarantee Fund and Export Working                  31
                          Capital Loans Guaranteed by State
                        Table II.3: Comparison of Eight State-Level Export Working               32
                          Capital Guarantee Programs

Figures                 Figure 1: Export Working Capital Loans Guaranteed by                     12
                          Eximbank and SBA
                        Figure 2: Export Working Capital Loans Guaranteed by Dollar              18
                          Value
                        Figure I.1: Eximbank’s U.S. Division and Delegated Authority             28
                          Lenders
                        Figure I.2: USEACs and SBA District Offices                              29




                        Abbreviations

                        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


                        Page 27                                       GAO/NSIAD-97-20 Export Finance
Appendix I

Main Components for Delivering Export
Working Capital Programs to Small- and
Medium-Sized Enterprises
                                          The U.S. Export-Import Bank (Eximbank) relies heavily on its U.S.
                                          Division and delegated authority lenders for delivering its Working Capital
                                          Guarantee Program. Figure I.1 shows the locations of the U.S. Division and
                                          delegated authority lenders.


Figure I.1: Eximbank’s U.S. Division and Delegated Authority Lenders




                 Eximbank U.S. Division
                 Delegated authority
                 lenders



                                          Source: U.S. Division, Eximbank.




                                          Page 28                                        GAO/NSIAD-97-20 Export Finance
                                          Appendix I
                                          Main Components for Delivering Export
                                          Working Capital Programs to Small- and
                                          Medium-Sized Enterprises




                                          The Small Business Administration (SBA) relies on the U.S. Export
                                          Assistance Centers (USEAC) and district offices to deliver its Export
                                          Working Capital Program. Figure I.2 shows the locations of USEACs and SBA
                                          district offices.


Figure I.2: USEACs and SBA District Offices




        USEACs

        SBA District Offices




                                          Source: SBA.




                                          Page 29                                       GAO/NSIAD-97-20 Export Finance
Appendix II

Information on State-Level Export Finance
Programs

                                      Table II.1 shows the 17 states and 1 U.S. territory in our survey that have
                                      export financing programs. Table II.2 shows the eight states that offer
                                      working capital guarantees as part of their export financing programs and
                                      the number and amount of guaranteed loans. Table II.3 compares the eight
                                      state-level export working capital guarantee programs.

Table II.1: States Surveyed With an
Export Finance Program or Export      States with export finance programs                States with export finance programs
Working Capital Guarantee Funds       without working capital guaranteesa                that offer working capital guarantees
                                      Alaska                                             California
                                      Arkansas                                           Florida
                                      Indiana                                            Georgia
                                      New Hampshire                                      Kansas
                                      New Jersey                                         Maryland
                                      New York                                           Massachusetts
                                      Puerto Rico                                        Minnesota
                                              b
                                      Texas                                              South Carolina
                                      Utah
                                      Washington
                                      a
                                        Oregon has a general credit enhancement fund that is not precluded from providing funding for
                                      export financing.
                                      b
                                       Texas has an export finance program, but funds allocated have not been available for providing
                                      working capital guarantees since March 1995. According to the state program administrator, the
                                      appropriate language needed to allow the Texas program to access the fund had been
                                      inadvertently omitted from the authorizing legislation.




                                      Page 30                                                         GAO/NSIAD-97-20 Export Finance
                                          Appendix II
                                          Information on State-Level Export Finance
                                          Programs




Table II.2: Leveraged Guarantee Fund and Export Working Capital Loans Guaranteed by State (fiscal years 1995 and 1996)
Dollars in thousands
                                                                  Fiscal year 1995                               Fiscal year 1996
                                                       Leveraged                           Leveraged
                                                         funding         Loans guaranteed    funding                    Loans guaranteed
State                                                      levela        Number     Amount     levela                    Number           Amount
California                                                 $38,908             165       $65,136         $38,908               91         $39,498
Florida                                                      5,000             N/Ab           N/Ab        20,000               25           3,588c
Georgia                                                      1,000                2           330           2,000                1              55
Kansas                                                       2,120                5         1,180           2,300                6          2,542
Maryland                                                    60,000d             22         19,000         50,000d              15          15,900
                                                                                   b               b
Massachusetts                                               30,000             N/A            N/A         30,000                 2          1,000
Minnesota                                                    3,365              10          1,380           3,674              10           1,550
South Carolina                                                 850                1           100             850                0               0
                                          Note: The states’ fiscal year begins July 1 and ends June 30. Amounts for loan guarantee
                                          represent amount of guarantee liability.
                                          a
                                            The leveraged funding level is calculated by multiplying the allocated funding level by the
                                          number of times the fund may be leveraged. This level represents the maximum amount of
                                          guarantees that may be outstanding at any one time.
                                          b
                                          Not available.
                                          c
                                            This amount represents the state’s total liability associated with the 25 loans guaranteed during
                                          fiscal year 1996.
                                          d
                                          This fund is available for domestic loans as well as export loan guarantees.




                                          Page 31                                                          GAO/NSIAD-97-20 Export Finance
                                     Appendix II
                                     Information on State-Level Export Finance
                                     Programs




Table II.3: Comparison of Eight
State-Level Export Working Capital   Program attribute                            California             Florida              G
Guarantee Programs                   Program attribute                            California             Florida              G
                                     First year of operation                      1985                   1994
                                     Cumulative default ratea                     1.5                    0                    0
                                                                                                             b
                                     Number of loans guaranteed during fiscal     256                    25                   3
                                     years 1995 and 1996
                                     Average amount of loans guaranteed during $408,726                  $143,520b            $
                                     fiscal years 1995 and 1996
                                     State-specific requirementsc                 Minimum state          Shipments from       M
                                                                                  content and            state port
                                                                                  state-based
                                                                                  operations
                                     Typical size of participating companies      15 to 20 employees     7 employees or        3
                                                                                  or $1 million to $20   $5 million or less in
                                                                                  million in sales       sales
                                     Maximum guarantee percentage                 90                     90                   9
                                     Maximum loan guarantee                       $750,000               $500,000             $
                                     Minimum loan guarantee                       None                   None                 N
                                     Number of lenders in program during fiscal   65                     20                   4
                                     years 1995 and 1996




                                     Page 32                                                   GAO/NSIAD-97-20 Export Finance
                                        Appendix II
                                        Information on State-Level Export Finance
                                        Programs




Georgia              Kansas             Maryland                     Massachusetts          Minnesota                 South Carolina
Georgia              Kansas             Maryland                     Massachusetts          Minnesota                 South Carolina
1994                 1990               1986                         1993                   1983                      1990
0                    0                  1.0                          0                      1.2                       0
3                    11                 37                           2                      20                        1

$128,333             $338,358           $943,243                     $500,000               $146,500                  $100,000

Minimum state content Minimum state     Minimum state                Minimum state          Minimum state             Minimum state content
                      content           content or shipment          content                content
                                        from state port

3 to 125 employees   500 employees or   $1 million to                50 employees or        100 employees or          5 to 50 employees
                     less               $5 million in sales          $10 million in sales   less

90                   90                 90                           70                     90                        85
$500,000             $345,000           $1,000,000                   $500,000               $250,000                  $170,000
None                 None               None                         $50,000                $25,000                   None
4                    10                 10                           4                      5                         1

                                        a
                                          The cumulative default rate represents the rate of defaults since the fund was first established in
                                        the state.
                                        b
                                            This figure represents fiscal year 1996.
                                        c
                                         For those states with a state content requirement, the required minimum state content was either
                                        50 or 51 percent.




                                        Page 33                                                           GAO/NSIAD-97-20 Export Finance
Appendix III

Lenders Participating in Eximbank’s and
SBA’s Export Working Capital Programs



                        13.0%                                              8.0%
                                                                                           14.0%
 23.0%                                   16.0%

                                                                                                       7.0%




                                                        71.0%
                      48.0%

                 SBA (141)                                        Eximbank (107)


               < $100 mil.    $100 to $250 mil.     $250 mil. to $1 bil.       > $1 bil.



                                          Note:Data shown represent 141 lenders participating in SBA’s program as of August 31, 1995,
                                          and 107 lenders participating in Eximbank’s program as of April 29, 1996. Asset size data is as of
                                          March 30, 1996, except for banks that merged before this date. For merged banks, we used the
                                          most recent asset size data available before merger.




                                          Page 34                                                         GAO/NSIAD-97-20 Export Finance
Appendix IV

Methodology for and Selected Results of
Lender Surveys

                      During our review, we surveyed lenders participating in Eximbank’s
                      Delegated Authority Program and lenders participating in SBA’s Export
                      Working Capital Program. The following is a summary of our methodology
                      and the responses we received for selected survey questions.


                      To obtain lenders’ perspectives on the Delegated Authority Program and
Survey of Eximbank    their willingness to provide smaller export working capital loans, we
Delegated Authority   surveyed all lenders participating in the program at the time of our review.
Lenders               Eximbank provided us with a list of all delegated authority lenders as of
                      February 21, 1996, and a database that contained information on all
                      working capital loans guaranteed during fiscal year 1995 and fiscal
                      year 1996, as of February 29, 1996. We surveyed all 67 delegated authority
                      lenders1 and obtained responses from 57, for a response rate of about
                      85 percent.2

                      For nonrespondents, seven had not provided any working capital loans
                      under delegated authority, and the other three had provided at least one
                      such loan under delegated authority. We pretested the survey with four
                      lenders, one each in Arizona, California, Texas, and Washington, obtained
                      feedback from Eximbank on the draft instrument, and made appropriate
                      revisions. Two of our interviewers surveyed banks by telephone between
                      April and June 1996. In some instances, banks responded by facsimile
                      machine. To ensure data reliability and consistency, we asked appropriate
                      follow-up questions during our telephone interviews. In some cases, we
                      followed up with lenders who faxed in responses, obtained information on
                      some questions not answered, and clarified certain responses. The
                      following are selected questions as asked, and the responses we received
                      from Eximbank delegated authority lenders.

                      Question 1:

                      The following is a list of factors that may be important to remaining
                      enrolled in the program. Can you add any other factors to this list? Also,
                      please identify the top three most important factors by placing a “1” by the
                      most important factor, a “2” by the second most important factor, and a “3”
                      by the third most important factor.



                      1
                       Eximbank’s list contained 68 lenders; however, 1 lender said that it was affiliated with another lender
                      and requested that we only administer one survey for both lenders.
                      2
                       For our analysis, we used 56 of the responses because 1 of the responses was based on a pretest that
                      could not be used in the analysis.



                      Page 35                                                           GAO/NSIAD-97-20 Export Finance
Appendix IV
Methodology for and Selected Results of
Lender Surveys




                                                                                  Percentage
Top 3 factors                                   1    2        3     Total        respondents
Fee incentives                                 9    18       15        42               75.0
Guarantee coverage of 90 percent               32   12       4         48               85.7
Quick processing time to meet customer
needs                                          11   19       15        45               80.4
Access to Eximbank’s expertise in
international finance                          0     2       7          9               16.1
Cap of $75(AA)/$50(A)/$25(B) million in
guarantees per bank                            0     0       2          2                3.6
Cap of $5(AA)/$3.5(A)/$2(B) million per
borrower                                       1     3       7         11               19.7

Question 2:

If there is a demand, how likely would your bank be to provide export
working capital loans for less than $833,333 to small businesses with
whom you have an established banking relationship? (Please check one.)


                  Somewhat         As likely   Somewhat                            No basis
Very unlikely       unlikely     as unlikely       likely         Very likely       to judge
4                           4             2              2                  44            0

n = 56

Question 3:

If there is a demand, how likely would your bank be to provide export
working capital loans for less than $833,333 to small businesses with
whom you do not have established banking relationship? (Please check
one.)


                  Somewhat         As likely   Somewhat                            No basis
Very unlikely       unlikely     as unlikely       likely         Very likely       to judge
9                           8             4              8                  27            0

n = 56




Page 36                                               GAO/NSIAD-97-20 Export Finance
Appendix IV
Methodology for and Selected Results of
Lender Surveys




Question 4:

Is there some amount under which your bank would generally not provide
export working capital loans?

Yes = 37
No = 18


Loan amount                                                                                   Numbera
$25,000                                                                                             1
50,000                                                                                              2
100,000                                                                                            10
150,000                                                                                             1
200,000                                                                                             3
250,000                                                                                             5
300,000                                                                                             2
350,000                                                                                             1
500,000                                                                                             7
1,000,000                                                                                           3
a
 Two lenders stated that they had a threshold, but did not provide the dollar amount of the
threshold.



Average: $302,143

Median: $250,000

Question 5:

In your opinion, how effectively would the following incentives encourage
banks participating in Eximbank’s Delegated Authority Program to
provide more export working capital to small businesses through the
program? (Please identify any other incentives you feel would be effective
and please check one box in each row.)

n = 56




Page 37                                                         GAO/NSIAD-97-20 Export Finance
                                              Appendix IV
                                              Methodology for and Selected Results of
                                              Lender Surveys




                                                                            Very                    Moderately         Not    No basis
                                                                        effective       Effective     effective   effective   to judge
Retaining a greater proportion of the fees                                     37             11             7           1           0
Having more relaxed collateral requirements                                    24             15            10           7           0
Other: Simplifying the paperwork and loan processing requirements               9              0             0           0           0
Other: Increasing the guarantee to 100 percent                                  7              0             0           0           0

                                              Question 6:

                                              In your opinion, how effectively would the following incentives encourage
                                              banks to provide more export working capital to small businesses in
                                              general? (Please identify any other incentives you feel would be effective
                                              and please check one box in each row.)

                                              n = 56


                                                                            Very                    Moderately         Not    No basis
                                                                        effective       Effective     effective   effective   to judge
Receiving credit for adhering to the Community Reinvestment Act                20             15            13           3           0
Relaxing loan loss reserve requirements for government guaranteed
loans                                                                          21             16            11           3           0



                                              We asked lenders participating in SBA’s Export Working Capital Program
Survey of Lenders                             about their banks’ policies and opinions on SBA’s program. SBA provided us
Participating in SBA’s                        with a list of 150 lenders enrolled in its Export Working Capital Program
Export Working                                as of August 1995 and a database of all loans guaranteed through the
                                              program during fiscal year 1995. During fiscal year 1995, 17 lenders did not
Capital Program                               make any loans guaranteed through the program, 98 lenders made only
                                              1 loan, and the remaining 35 made 2 or more such loans.

                                              We surveyed all 35 participants that had funded 2 or more loans
                                              guaranteed through SBA’s Export Working Capital Program during fiscal
                                              year 1995 and received responses from 28 lenders, an 80-percent response
                                              rate. These 28 lenders had asset sizes ranging from $33 million to
                                              $44 billion and were located throughout the United States. The seven
                                              nonrespondents surveyed had asset sizes that ranged from approximately
                                              $84 million to $49 billion and were also located throughout the United
                                              States.




                                              Page 38                                                    GAO/NSIAD-97-20 Export Finance
Appendix IV
Methodology for and Selected Results of
Lender Surveys




We pretested the questionnaire with four lenders, one each in Oregon,
New Jersey, New York, and Washington, D.C., in early July 1996, and made
appropriate revisions. Two of our interviewers surveyed the lenders by
telephone between July and August 1996 and allowed some lenders to
respond by facsimile machine. To ensure data reliability and consistency,
we reviewed and performed edit checks of the instruments returned by
facsimile machine. The following are selected questions as asked and the
responses we received from SBA lenders.

Question 7:

Similar to SBA’s Export Working Capital Program, the Eximbank
administers a working capital guarantee program. Are you aware of this
program?

Yes = 25
No = 3

Question 8:

Does your department currently use Eximbank’s working capital
guarantee program?

Yes = 13
No = 12

Question 9:

Overall, how would you characterize your department’s experience with
Eximbank’s program?

1 = Very positive
7 = Generally positive
3 = Neutral
0 = Generally negative
0 = Very negative
2 = Not sure

n = 13




Page 39                                       GAO/NSIAD-97-20 Export Finance
Appendix IV
Methodology for and Selected Results of
Lender Surveys




Question 10:

In your opinion, which of the following reasons best explains why your
department has not used Eximbank’s working capital program? (Please
rank up to 3 reasons by placing “1” by the most important reason, “2” by
the second most important, and “3” by the third most important.)

The number of respondents that ranked the following reasons “1”:

3 = Believe Eximbank’s program was intended for larger export
transactions
1 = Eximbank offices (headquarters and regions) are not accessible
2 = Eximbank’s program viewed as being too bureaucratic
5 = Satisfied with SBA’s program and perceive no need to use Eximbank’s
   program
1 = Other: (Please specify) Local representation lacking.

n = 12




Page 40                                        GAO/NSIAD-97-20 Export Finance
Appendix V

Comments From the Small Business
Administration

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




Now on p. 1.




Now on pp. 1-2.




Now on p. 2.
See comment 1.

Now on pp. 3-4.




                             Page 41   GAO/NSIAD-97-20 Export Finance
                    Appendix V
                    Comments From the Small Business
                    Administration




Now on pp. 4-5.




Now on p. 5
See comment 2.




Now on p. 5.



Now on p. 8.




Now on p. 9.




Now on pp. 14-15.




Now on p. 15




                    Page 42                            GAO/NSIAD-97-20 Export Finance
                    Appendix V
                    Comments From the Small Business
                    Administration




Now on p. 20.




Now on pp. 24-25.




Now on p. 28.




Now on pp. 33-34.




                    Page 43                            GAO/NSIAD-97-20 Export Finance
               Appendix V
               Comments From the Small Business
               Administration




               The following are GAO’s comments on SBA’s letter dated November 26,
               1996.


               1. Data was not readily available for us to make a comparable statement
GAO Comments   regarding the average number of employees per company that have
               obtained working capital loans guaranteed from Eximbank.

               2. Eximbank staff are presently located at 4 of the 19 USEACs currently in
               operation. Eximbank has indicated that it believes a combination of its
               regional office staff and city/state participants would be able to respond to
               regional USEAC needs for Eximbank services.




               Page 44                                          GAO/NSIAD-97-20 Export Finance
Appendix VI

Comments From the U.S. Export-Import
Bank

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




                             Page 45   GAO/NSIAD-97-20 Export Finance
                    Appendix VI
                    Comments From the U.S. Export-Import
                    Bank




Now on pp. 24-25.




                    Page 46                                GAO/NSIAD-97-20 Export Finance
                      Appendix VI
                      Comments From the U.S. Export-Import
                      Bank




Now on pp. 3, 5, 6,
and 28.




                      Page 47                                GAO/NSIAD-97-20 Export Finance
                Appendix VI
                Comments From the U.S. Export-Import
                Bank




Now on p. 14.




                Page 48                                GAO/NSIAD-97-20 Export Finance
                 Appendix VI
                 Comments From the U.S. Export-Import
                 Bank




Now on p. 14.




See comment 1.




                 Page 49                                GAO/NSIAD-97-20 Export Finance
                    Appendix VI
                    Comments From the U.S. Export-Import
                    Bank




Now on pp. 28-29.




See comment 2.




                    Page 50                                GAO/NSIAD-97-20 Export Finance
                 Appendix VI
                 Comments From the U.S. Export-Import
                 Bank




See comment 3.




                 Page 51                                GAO/NSIAD-97-20 Export Finance
               Appendix VI
               Comments From the U.S. Export-Import
               Bank




               The following are GAO’s comments on Eximbank’s letter dated
               December 2, 1996.


               1. We modified the report to better highlight the difference in SBA’s and
GAO Comments   Eximbank’s credit qualification requirements. Eximbank requires
               borrowers to have a positive net worth; SBA does not. Eximbank’s
               requirement is stipulated in its working capital guarantee program
               instructions. Also, ProAction Agency, the consultant commissioned by
               Eximbank and SBA to evaluate harmonization efforts, reported in May 1996
               that this requirement was a key difference between each agency’s
               program. Although Eximbank officials stated that they have the flexibility
               to waive this requirement, they acknowledged that, in practice, there were
               only a few instances in which this was done.

               2. The default information presented in the report is not intended to
               demonstrate differences in default rates between the U.S. Division and the
               Delegated Authority Lender Program. Further, we did not include in the
               report any comparison of claims after a default under Eximbank’s or SBA’s
               program. Rather, the report provides information on the number of
               defaults.

               3. The report recognizes that SBA’s cost estimates for administering its
               Export Working Capital Program do not include the time or costs for the
               agency’s district office staff involved in handling export working capital
               guarantees. It does not attempt to make a direct comparison with
               Eximbank’s estimated program costs.




               Page 52                                         GAO/NSIAD-97-20 Export Finance
Appendix VII

Major Contributors to This Report


                        John P. Hutton, Assistant Director
National Security and   Jean-Paul Reveyoso, Evaluator
International Affairs
Division, Washington,
D.C.
                        Martin H. De Alteriis, Social Science Analyst
General Government
Division
                        Evelyn E. Aquino, Evaluator-in-Charge
San Francisco Field     José R. Peña, Evaluator
Office                  May M. Lee, Computer Specialist
                        Gerhard C. Brostrom, Communications Analyst




(711171)                Page 53                                         GAO/NSIAD-97-20 Export Finance
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