Small Exporters Hurt Most by Poor Bank Health
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UPDATED: Apr 5, 2013
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Increased access to business loans would boost exports by small businesses, according to a report released on Wednesday by the U.S. Small Business Administration Office of Advocacy.
The report examined the relationship between small business exports and bank health. It found that smaller exporters, who rely more on business loans for operating funds, were more adversely affected by reduced bank credit.
Due to the nature of international trade, financing is a key part of an export business’ operation strategy.
“Because exporting involves foreign customers, the traditional rules and regulations that protect a seller in the U.S. don’t apply, therefore it is seen as a riskier proposition, and typically requires more cash and/or bank backing,” said Molly Brogan, Vice President of Public Affairs for the National Small Business Association, in an email.
According to the study, when bank health declines and banks lend less, small business exporters begin to represent a smaller monetary share of all exports. This effect is strongest among business with 100 or fewer employees, but hardly affects companies with 500 or more employees.
Additionally, exporters who specialize in industries that rely more on outside financing, such as those dealing with chemicals and textile mill products, were harder hit by decreased access to business loans.
As the country’s primary job creators, the health of small businesses is a critical policy issue. The SBA report argues that improved bank health would lead to better access to financing and increased exports. Specifically, the SBA states that businesses with 20 or fewer employees need more assistance from U.S. Export Assistance Centers such as the SBA, the U.S. Chamber of Commerce and the Export-Import Bank of the United States.
The Export-Import Bank in particular plays a critical role in financing small business exporters, Brogan said.
“While there are other SBA loan programs that can help with general financing, [the Export-Import Bank’s] expertise in international business is simply unmatched by any other program out there,” she said. “[The Export-Import Bank] is the ‘bank of last resort’ or even ‘bank of only resort’ because relatively few U.S. commercial banks finance exports and most of those that do prefer to deal with larger companies.”
In addition to issuing business loans, the U.S. Small Business Administration also has programs geared towards training small firms and preparing them to operate in the global economy. In a guest post for the Huffington Post, Karen Mills, an administrator for the SBA, wrote that the SBA has guaranteed 6,400 business loans to small exporters since fiscal year 2009. In the same period the SBA trained 29, 000 lenders on their export loan guarantee programs.
The hope is that stronger small businesses will lead to a stronger economy, but according to Brogan, while small business exports have grown in the last three years, banks have only become more restrictive in their lending practices.
“The U.S. financial sector is far less engaged in world trade than the financial sectors in Europe, Asia and other parts of the world, where banks themselves encourage business customers while promising products to export,” Brogan said. “To truly step up American exports, our banks can be doing more.”