The launch of a statewide trade finance initiative this year has increased access for some California firms to financing options for their international transactions.
Small- and medium-sized export businesses in San Diego and throughout the state were left reeling in the wake of last year’s state budget shortfalls, which forced the closure of the Technology, Trade and Commerce Agency, California’s sole trade management and promotion entity.
But the new program, Trade & Export Finance Online, dubbed TEFO, is a public-private partnership involving state, regional and local governments, financial service providers and the small-business community.
It’s being touted by its backers as a means of revitalizing California’s international trade leadership position.
At the very least, according to Matt Anderson, the director of the U.S. Department of Commerce’s San Diego office, it is providing additional financing options for small businesses involved in international trade.
The Bay Area Economic Forum and the Los Angeles Area Chamber of Commerce, owners of Monterey-based Tradeport, which helped found TEFO, plan to provide a full range of export and import trade financing products. This will include what exporters call “pre-shipment working capital” , the often hard-to-get capital firms need to purchase goods for export and to pay off all agents in advance of shipping , ranging from $10,000 to $10 million.
The program will be accessible to California importers and exporters through its Web site, www.tefo.org, for researching financing options. TEFO will also provide small businesses with free advisory services from international trade consultants.
Ted Eastman, a trade finance specialist at TEFO, said its goal is to include three lender-partners for each of 15 categories of product types that TEFO will offer.
One of the key players, among the handful of lenders chosen to participate in the initiative’s early stage is La Jolla-based InterNetLC.com, an online provider of international trade finance services.
According to the chief executive officer and founder, John Dunlop, InterNetLC.com and TEFO step in to help California companies that have trouble securing financing from large banks, which typically require loan applicants to have substantial collateral, high-volume transactions and a transaction history qualifications that small businesses often do not meet.
“In North America, major corporations are well banked, but small- and medium-sized enterprises are often unable to obtain the financing they need for their import and export operations,” said Jim Faith, the director of operations for Tradeport, the California international trade portal that will support TEFO, and a trade consultant managing TEFO.
“Before a small firm ships the (export) goods, it is hard to get a bank to make a loan without collateral, and many banks don’t regard a letter of credit as an asset until after the goods are shipped,” Dunlop said.
So, many businesses that simply lack the collateral or credit lines to qualify for a short-term loan to make an export transaction work, will now turn to TEFO.
Last month, Dunlop announced that InterNetLC.com closed the books on its first TEFO-related transaction for San Francisco-based World Energy Labs, securing a $28,775 letter of credit for the technology company a document providing assurance that payment for the international transaction has been safely deposited in a third-party foreign bank.
Dunlop said this case is a good example of the usefulness of the TEFO program for small businesses.
According to Dunlop, after spending four years and millions of dollars in research and development designing a product for export that helps companies maximize the use of some types of utility batteries, the California firm had trouble maintaining its cash flow to keep up with the volume of sales demands.
The company’s regular bank, unable to assist it with pre-export capital for a major shipment to a Philippines-based firm, referred World Energy Labs to a TEFO team, which included Dunlop.
At TEFO’s recommendation, and with InterNetLC.com managing the transaction document, the World Energy Labs changed its international sales contract and secured a loan arranged by InterNetLC.com.
Because they provide uncollateralized loans, the lending arrangements that TEFO and consultants such as InterNetLC.com arrange are meant to be short term in nature.
Dunlop said the average duration of a loan arranged by his firm is fewer than 30 days and, on average, rates are 50 percent higher than they would be at a traditional lending source, such as a large U.S. bank.
“The whole idea for a small business is to establish a line of credit that they can use to borrow against. When you have that history, it helps you qualify for a line of credit, which in turn can be used for collateral,” Dunlop said.
Complement Large Banks
What is critical is that small exporters have a range of possibilities and appropriate options for financing individual transactions, according to Anderson.
“TEFO is not meant to compete with, but to complement what the large banks are doing,” Anderson said. “Typically there are requirements as to how long a business has been incorporated and when they started turning a profit, that banks look at as qualifying factors for export financing. This makes it harder for smaller businesses to get international transactions off the ground.”
There used to be more options for such firms.
Under the successful California Export Finance Office, which was a state-funded program managed in Sacramento by the now shuttered Technology, Trade and Commerce Agency, more than $1.8 billion in export sales from small and medium businesses was recorded since 1984.
Before January 2004, small businesses that could not qualify for regular bank loans could turn to CEFO for financing. CEFO guaranteed coverage of up to 90 percent of an export loan, allowing for a maximum guarantee of $750,000 and a loan of $833,000.
“There were a ton of terrific success stories for small exporters under CEFO,” said Anderson.
Yet for more than a year, there has been no state-sponsored coordinating agency to support the nearly one-quarter of the state’s $1.5 trillion economy represented by international-related commerce , a roughly $350 billion industry.
According to Cassie Stiles, the first vice president of International Trade Services at Comerica Bank in San Diego and a past chairwoman of CEFO, while the Export-Import Bank and the Small Business Administration continue to offer export programs for small businesses in need of pre-export loans, the CEFO program did lend itself to California companies that were excluded from those programs.
“CEFO played a very important role. Exporters that used it were small companies that had a single transaction that they could not finance through a traditional bank. CEFO was more flexible. After CEFO, in the state of California, there is no state-run option for securing financing,” Stiles said.
While California is now seeing TEFO and lenders such as InterNetLC.com step in to fill that void, “These are meant more as an export financing springboard for small companies into the international arena for financing,” Anderson said, rather than as a substitute for a program such as CEFO.
Dunlop said to the extent that globalization has redefined export and import entities, “The definitions of who’s an exporter and who’s an importer and what percentage of components are manufactured in the U.S. are all kind of blurry now.”
It is now more difficult to maintain CEFO’s more narrow guidelines, which required that more than half of the exported goods be produced in California, Stiles said.
Instead, TEFO’s objective is to provide an innovative approach, combining private sector capital with consultation services from international trade specialists, accessible to small businesses through a Web portal, according to Faith, the TEFO manager.
“What we’ve done with TEFO is to gather together a managed network of lenders and create an online portal staffed by trade specialists who will assist applicants with their trade financing needs,” Faith said.
Users , namely California-based small businesses , will be able to submit their contact information and financial requirements via an online application that will be reviewed by TEFO staff, Faith said.
“The advantage is that it can streamline the application process,” he said.
Small businesses make up a significant portion of the state’s export market.
Dunlop cited a study released by the California Chamber of Commerce, showing 40,000 California-based companies exported their products and services in 2003. Of this, roughly 94 percent of those companies were small businesses with fewer than 500 employees. It accounted for 40 percent of the state’s total overseas sales during the year.
So, there is demand for programs such as TEFO. Faith said TEFO has recorded four financing transactions, including World Energy Labs, but he is continuing to work on implementing technology to help clients pre-qualify themselves for funding.
Eastman said TEFO has already created a multimillion-dollar investment fund to help finance deals arranged and structured through members of the team, such as InterNetLC.com.
“When it comes to export financing, for every deal, companies need to know what their options are and what their best deals are for each option,” Anderson said.
The bottom line, according to Anderson, is that TEFO is increasing the available options.