Foreign credit programs get user-friendly facelift.

Small exporters attempt to wend way through rule maze 

The foreign credit insurance programs provided by the U.S. government to facilitate trade deals may be in the process of getting a facelift. But this may not help the small exporter, who is still confronted with obstacles on both the financing and credit insurance front.

Government credit insurance, which protects the lender and/or the exporter, is underwritten by the Export-Import Bank of the United States (Eximbank) and serviced through the Federal Credit Insurance Agency Management Co. (FCIA).

While these policies are some of the foremost means of credit protection available to exporters, would-be lenders still remain leery because the pacts sometimes leave them vulnerable to non-payment.

The loan agreements are conditional and the transactions may require lenders to do large amounts of administrative work, said bank trade finance sources who wished to remain anonymous. That means lenders often do not find them cost effective because they don't make much on loans for small deals.

While small exporters don't necessarily do small deals, funding primarily involves both the credit line available to exporters -- some smaller exporters have difficulty establishing ones large enough for lender acceptability -- and the credit of foreign buyers, where the risk lies in not knowing a foreign company's fiscal health, according to bank sources.

"It is a major problem," said Tom Hodge, vice president of marketing at the World Trade Finance Co. in Long Beach. Lenders often "don't feel comfortable" with the agreements "because even if they do everything right, something could go wrong," he said. The upshot: Eximbank could get out of paying a claim to the lender on documentation technicalities.

"We're always concerned with documentation," said Art Obester, the west coast representative of Eximbank. "If the documentation is not there, it could be reason for the denial of a claim."

But, as Hodge noted, "if you think signed documents are enough" for protection, "you're wrong."

The lender, he said, must keep monthly shipment reports, current and favorable credit reports on foreign buyers and essentially do audits on these companies in order to remain up to date on an overseas transaction. "The bank has to be on top of the exporter to make sure the exporter is doing everything" according to schedule, he said.

Though possible changes in the process are now being considered by Eximbank, the requirement of proper documentation will not change, Obester said. "If a bank does not act in due diligence, we should not pay the claim."

He noted Eximbank is working to simplify the financing process so that banks "have a higher level of comfort" with the agreements. "We recognize these problems and are addressing the issue right now," he said.

One of the ways Eximbank hopes to change things is to take a more equal position with the bank in the event of exporter bankruptcy instead of assuming the first-payment position over the bank. Both Eximbank and the lender would be paid a portion, whereas before Eximbank would collect first.

"In the past," said Obester, "we wanted to be out first."

But, banks would really like to have agreements which guarantee they get paid regardless of what happens. "They don't want any risk basically," he said.

Don Schmoll, a spokesman in the El Segundo office of FCIA Management Co., said, "The way banks are structured, it is becoming more and more that the individual account officer needs a broad background" in the international trade field. "It takes a good deal of knowledge to lend against export receivables."

According to bank sources, servicing exporters, especially small ones, is a hard issue to deal with. By nature, many banks don't want to get involved because the economics aren't there. There's no financial incentive for them to get involved.

To make matters more difficult, some small exporters are running up against obstacles on both ends. Those who have the credit insurance face uncomfortable lenders and those trying to get the credit insurance so they in turn can go to the lender could face difficulty as well.

"We tried to get FCIA insurance," said exporter James Yoder, "and they turned down all of our buyers. And one of them was a $100 million program."

Yoder, who is president of Beauty Products International Inc. in Malibu, said that he tried to work with FCIA about two years ago when his cosmetics firm was doing about $1 million per year in sales. "I don't believe that they want to do business with small firms," he said.

But, FCIA is very much interested in small businesses, according to Andrew Pickering, vice president of FCIA Management Co. in New York. Currently, he said, "82 percent of the total policy holders are small businesses and they account for 36 percent of FCIA's total volume."

Those who apply for credit insurance and are turned down are "an extremely small percentage," said Pickering, running about "4 percent."