As policymakers continue wrestling with how to encourage business lending, including to small businesses eyeing export markets, bankers say one little-noticed casualty of the credit crisis has been restrictions on letters of credit needed to complete contracts.
Best known for their role in guaranteeing payments between contractual parties in separate countries, letters of credit also play an important role for small businesses seeking status as subcontractors in large stateside projects that rely on public funding.
With the economy on the rebound, credit for small businesses is still scarce, the result of continued uncertainty and businesses draining their cash reserves during the downturn as revenues evaporated for many.
Declines in revenues and asset values have subsequently forced banks to take a harder line in their assessments of applications for letters of credit, with some considering whether U.S. Small Business Administration programs could help them cover the risks.
In its quarterly credit survey sponsored by TD Bank, the Connecticut Business & Industry Association does not query members on their ability to secure lines of credit. In the most recent CBIA survey published last month, however, Connecticut business owners gave credit conditions in Connecticut their worst grade since CBIA started the survey in 2004, though nearly three in four businesses indicated that credit availability was not a problem for their business.
Peter Gioia, vice president and economist of CBIA, said the state is more dependent than many on access to international markets due to the expert craftsmanship of many exporters who are able to charge a premium for their products.
After Connecticut exports jumped 11 percent in 2008, they fell off 8 percent last year to just above $14 billion.
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Hamid Malakpour, a marketing manager for TD Bank who is vice chairman of the Stamford Chamber of Commerce, said pockets of difficulties remain in the credit markets, including in the area of letters of credit.
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Still, if credit remains tight federal agencies are attempting to get the wheels turning as part of the overall federal stimulus efforts. In its first fiscal quarter ending Dec. 31, the Export-Import Bank of the United States authorized a record $9.9 billion in loans and guarantees on international contracts, triple the level of a year ago when global credit markets collapsed.
Those approvals included guarantees on contracts involving Westport-based Terex Corp. and Wilton-based Louis Dreyfus Corp., but officials note that they are not just reaching out to sophisticated corporations. In the past three months, Ex-Im Bank authorized $1 billion in small-business financing and added more than 100 new small-business clients ”“ many of them first-time exporters.
Ex-Im Bank”™s directors include Diane Farrell, a former Westport official who twice ran for the Fourth District seat in the U.S. House of Representatives.
In December alone, Ex-Im Bank OK”™d $5.7 billion in guarantees, also a record amount for any month. The U.S. Commerce Department said this month that U.S. exports were $143 billion in December, up 5 percent from a year ago but not nearly enough to overcome an overall 15 percent drop in U.S. exports between 2008 and 2009.
This month, the Commerce Department gave details on the new National Export Initiative, which seeks to expand trade advocacy on behalf of small businesses while improving access to credit for those that wish to export goods. Among other goals, the National Export Initiative hopes to hire 330 trade experts to the International Trade Administration to advocate on behalf of U.S. companies.
