Having sufficient working capital is key to building a successful business and critical for companies engaged in international trade to manage extended sales cycles. Many growing small- and medium-sized enterprises (SMEs) find themselves without access to an adequate line of credit for this purpose, falling somewhere in between smaller general lines and larger trade-focused facilities.
To better support growing small businesses, the US Small Business Administration (SBA) recently announced a new pilot loan program that intends to help close the trade finance gap experienced by SME exporters. The 7(a) Working Capital Pilot (WCP) is the SBA’s first new loan program introduced in more than a decade and will be able to support lines of credit up to $5 million.
As a domestically focused federal agency, the SBA maintains a network of more than 2,000 lenders that originated $33.9 billion of loans in 2023. The WCP is modelled after the SBA’s Export Working Capital Program (EWCP), with the key difference that the Pilot is designed to support both domestic and export financing under a single facility. The addition of the WCP will help bridge the gap between the Agency’s term loan and trade finance programs.
“The SBA succeeds in filling gaps and supporting the holistic needs of a business. The WCP is a move in that direction and allows for a small business to begin exploring exporting,” said Daniel Krupnick, the SBA’s Associate Administrator in the Office of International Trade.
“As we know most US exporters are predominantly domestic in nature. It is our job to make sure we have a comprehensive mix of loan programs designed to meet all their financing needs in an efficient and cost-effective manner.”
In March 2023, the SBA published the Total Addressable Market Study which analysed small business exports and the mixture of revenue between domestic and foreign buyers. In the United States, 97% of exporters are small businesses and they account for approximately 35% of all export activity. In addition to capturing the contributions of SMEs in global trade, the study found that small business exporters average 9.7% of their revenue from international orders which does not always necessitate using a dedicated trade finance program such as the SBA’s EWCP.
With a holistic view of SME exporters in mind, the SBA began work on a domestically focused working capital product that is also designed to support export financing needs. “In many ways, the future of the SBA’s role in export finance begins with domestic working capital” states Daniel Pische, the SBA’s National Director of Trade Finance.
“Given the size and breadth of the US domestic market, it is natural that most small businesses begin selling at home before expanding abroad. It is important that we have a strong domestic line of credit program that can then expand to include export orders without requiring the business to obtain another loan.”
Establishing a loan program to support both domestic and international orders also provides a new method to assist new-to-export businesses. By allowing an SME to leverage their domestic orders and their existing line of credit, these small businesses will be better positioned to take on export opportunities as they present. To accomplish this objective, the WCP rules provide support for both insured and uninsured foreign accounts receivable.
By allowing a lender to provide availability on a limited amount of uninsured foreign accounts receivable with a reduced advance rate, the WCP is intentionally positioned to support companies that are new to exporting or do so on an infrequent basis. This scenario historically fell between other federally guaranteed loan programs and thus went underserved.
Mina Wales, Deputy Associate Administrator in the SBA’s Office of International Trade, said, “Expanding our working capital offerings is a central part of the SBA’s strategy for supporting emerging exporters. With most of the SBA’s loan programs focused on supporting domestic transactions, our goal is to tap into our strong lender base to generate support for small businesses as they begin to open international markets.”
Both asset-based and transaction-based facilities can be supported for the administration of the WCP. Of the two available options, asset-based WCP loans are best positioned to accommodate SMEs with relatively consistent working capital needs throughout the year. An asset-based WCP is also the facility structure most likely to be used by new-to-export companies that are just beginning to sell internationally.
For SMEs who are taking on a contract or a large new buyer, the transaction-based WCP may be more suitable as it can support advances against individual orders. These facilities can be structured to support a single contract or used on a revolving basis for multiple projects. Transaction-based WCP loans can also be paired alongside asset-based facilities to support a company’s need for both types of working capital financing.
Establishing the WCP as a mirror of the existing Export Working Capital Program allows both products to share a common ruleset and expands the overall range of transactions that lenders can support. SBA lenders can now use the WCP program as a starting point when evaluating a line of credit request. Once the lender works through the initial underwriting and structure for the line, they can then opt to use a more specialized export finance solution such as the EWCP when necessary. While this can largely be seen as a process enhancement, it will streamline how lenders approach credit line requests.
The SBA is allowing lenders to obtain delegated authority for WCP loans. This is a new feature for SBA pilot loan programs and is intended to help accelerate the availability of the WCP and reduce the processing burden on lenders. Details on obtaining delegated status can be found in the WCP Program Guide.
The process for obtaining delegated status will recognize an institution’s experience with conventional and government-guaranteed asset-based programs, including, the Export Working Capital Program, SBA CAPLine program, and the Export-Import Bank’s Working Capital Guaranty program.
The SBA has published the WCP Program Guide on its website. It outlines the full details of the Pilot, including information on how US-based lenders can participate. Information on the WCP can be found on the SBA’s website.
