Out of all the companies in the United States, only 4 percent are exporters.
This statistic is surprising given the outsized role that exports played in helping the United States recover from the Great Recession. During the initial recovery period, nearly 40 percent of U.S. GDP growth came from exports.
Today, almost 80 percent of global purchasing power resides outside the United States. Rising global demand—especially in emerging markets, with their expanding middle-class consumer bases—has heightened U.S. firms’ interest in exporting.
Becoming an exporter requires investments of time and money. International marketing and sales, order fulfillment and distribution, and trade compliance all add up. Harder still can be securing longer-term loans and equity finance to fuel a company’s international growth. For small- and medium-sized enterprises (SMEs)—those employing fewer than 500 workers—the cost of entering new markets poses a sizable challenge. Without access to capital, many of these smaller firms forego lucrative export opportunities that would enable them to grow and create jobs in the United States.
SMEs typically have a harder time securing export financing than large firms do. Their smaller size and limited assets, along with elevated loan processing costs, make banks less interested in working with them. Meanwhile, most SMEs are unaware of the export financing programs offered by the Export-Import Bank, the Small Business Administration, and other institutions.
There is an opportunity for state governments to take steps to improve SMEs’ access to export financing. By incorporating export support into their broader economic development strategies, states can increase the number of exporters, which in turn will boost job creation and strengthen their metropolitan areas’ economies.
Our new brief—“Bridging Trade Finance Gaps: State-Led Innovations to Bolster Exports by Small and Medium-Sized Firms”—offers three complementary approaches that states can adopt in their efforts to address the SME export financing shortfall.
First, states can work to raise awareness among SMEs and financial institutions about existing federal and private instruments and sources of export financing. This action will encourage greater numbers of firms and banks to take advantage of proven solutions to the export finance challenge.
Second, states can offer additional financial instruments to help reduce SMEs’ barriers to exporting. Direct loans and loan guarantees, royalty-based financing, and accounts receivable financing, among other interventions, make it easier for potential SME exporters to expand into new markets. And in addition to banks, states can work with a broader set of actors—such as with factoring companies and equity funds—to meet SME’s diverse export finance needs.
Third, states can set up new finance entities that provide direct export finance support exclusively targeted to SMEs. A state-level export-import bank—perhaps akin to the California Export Finance Office (CEFO), which offered a variety of guarantees for smaller export-related loans from its inception in 1985 until 2003, when state budget problems forced its closure— could be able to offer flexible, tailored solutions to the challenges facing these smaller firms.
State-level efforts are no replacement for federal programs like the Export-Import Bank, which plays a critical role in helping U.S. companies compete in the global marketplace. But state strategies can provide a much needed supplement to federal export finance programs by bridging the gaps in the current system. By implementing innovation solutions to the challenges facing potential and current SME exporters, states can help SMEs expand into new markets and bolster economic growth in the process.