Like a lot of smaller banks, Heartland Bank in St. Louis had never done export financing.
But when one of its borrowers, Zisser Tire Co. Inc., told Heartland about a loan-guarantee program started in April 2004 by the Small Business Administration and the Export-Import Bank, it was coaxed into the uncertain world of international lending.
John Zisser Jr., the tire company's owner, said he found out about the program through the St. Louis County Economic Council and used a loan from Heartland - which received an 80% guarantee from the SBA-Export-Import program - to export tires to Europe.
Robert Grana, Heartland's vice president, acknowledged that the program is not about to make his bank a threat to the larger outfits that dominate international lending. It will, however, help the $533 million-asset Heartland cultivate relationships with customers interested in international business, he said. In this case, what's good for small banks is good for small business - and that is exactly what the SBA and the Export-Import Bank are counting on.
The SBA-Export-Import Bank Co-Guarantee Program was designed to offer small businesses more capital for exporting by providing guarantees of up to 90% on loans as large as $2 million. The fees for the guarantee are low, about 25 basis points of the loan amount, and the lender will accept the export inventory as collateral - a key selling point for entrepreneurs, who are often asked to provide personal guarantees to secure loans.
"We mean it," said Robert Elsas, a senior international credit officer for the SBA. "We're not going to take necessarily the house, the person's stock portfolio, nor the firstborn." The idea is that if banks feel more secure about making a loan with uncertain risk, more businesses will be able to get bigger loans.
"It would also enable a smaller bank to put a $2 million gross loan on their books with only a $200,000 exposure, because the SBA and Ex-Im will pick up the rest," Mr. Elsas said. "So their loan-loss reserve that the Federal Reserve Bank requires is less. ... That enables banks to lend more money to more businesses in general."
Another attractive feature is that interest begins accruing 60 to 90 days after the loan is made, later than most SBA loan guarantee programs. Proceeds from the co-guarantee program can be used to manufacture or acquire goods for export, to support standby letters of credit, to finance foreign accounts receivable, or for pre-shipment working capital.
The SBA provides guarantees up to $1.6 million, and the Export-Import Bank provides additional coverage on larger loans up to the $2 million maximum. The SBA also handles the lion's share of the interactions with banks, while the Export-Import Bank helps advertise the program.
"SBA, having worked with the smaller companies, knows them well and is better able to service their particular needs," said Glenn Roe, the senior vice president and manager of the international group for the $4 billion-asset Fulton Bank of Lancaster, Pa. "This gives both the bank and the company a better opportunity to transition out of one program and into the other program."
Mr. Roe said his bank, the lead subsidiary of the $8.1 billion-asset Fulton Financial Corp., started doing international lending in the late 1990s and that its business has grown rapidly since then. But he still expects to use the co-guarantee program - it's an "arrow in the quiver," he said.
Last month another Fulton subsidiary, the $1.2 billion-asset Lafayette Ambassador Bank in Easton, Pa., became the first bank on the East Coast to offer a loan through the program. Working with Mr. Roe's group, Lafayette did a deal that will allow an Easton company to sell its industrial gas products overseas.
Word out about the program has spread slowly. The Bankers Association for Finance and Trade, which represents banks active in international trade, told the SBA and the Export-Import Bank that it would help promote it, but most of the publicity has been in the Washington area, said Bruce Portillo, the Washington-based group's director of membership and communications, said.
"We have got to get out into the field," Mr. Portillo said.
Advertising will be crucial for selling traditionally conservative small banks on financing trade deals in foreign countries - where everything from cultural differences to import competition to a lack of familiarity with foreign laws makes risk extremely difficult to assess. Few of these banks have trade finance departments, and they often refer customers inquiring about a loan to facilitate trade to larger banks.
However, more small banks are giving the export financing market a try. According to the summer edition of the Federal Deposit Insurance Corp.'s "Outlook" report, small and midsize businesses make up about 97% of U.S. exporters and account for 30% of export sales.
"Despite the low number of banks currently involved in global trade, more community banks are becoming interested in pursuing the matter," the report said. "Some reasons include growth in their potential customer base, a nearby large bank's departure from the business line, an increase in experienced international managers ... and growing demand for trade finance services."
The guarantee program was created after Congress asked the Export-Import Bank to set aside 20% of the money it lends each year for small businesses. The SBA and the bank have closed seven deals under the program and will soon close another two, said Kevin Taylor, the bank's director of business credit.
The Export-Import Bank has not hit the 20% mark yet, but Mr. Taylor said he would like to see two or three deals per month go through in the future.
Most loans made with the co-guarantee program are smaller than $2 million. Mr. Elsas said that the SBA would like to see the limit raised to somewhere around $5 million. "The businesses we're working with are very sophisticated," he said. "They're not pizza shops - not to put pizza shops down, but they don't export pizza very much." "A $2 million revolving line of credit really isn't very much money. … But I'm not Congress, I'm just a little old loan officer."
