Getting Started

The Biggest Roadblock to Upping Exports


(Due to a reporting error, an earlier version of this story incorrectly identified David Old as a Marine veteran. He was in the Marine Corps Platoon Leader Class, a pre-commission program for college students, but did not serve in the Marines.)

Other business owners might sour on exporting after what happened to David Old. His company, a 15-employee wood flooring producer in Las Vegas, N.M., had completed a $130,000 order for a new theater floor for a customer in Seoul, South Korea, in 2008. The buyer paid a deposit up front, passed a credit check, and made the first two payments on time. But the final payment of $40,000, due after the financial crisis began that fall, never arrived.

Despite the loss, Old is counting on foreign sales to expand his business from $1.25 million in revenue this year to $20 million in three years, based on a process he's developing to make high-quality block flooring out of low-grade wood. A 54-year-old who speaks six languages and had a previous business trading aircraft internationally, Old says customers from around the world find him online, and vice versa.

His company, Old Wood LLC, represents both the challenges and the potential that exporting presents small businesses. President Barack Obama set a goal to double American exports in the next five years in his National Export Initiative launched Mar. 11. For that to happen, he's pushing for more companies like Old's to expand into new markets abroad.

Companies with fewer than 500 employees make up half of private nonfarm GDP but only 30% of exported goods, according to data from the Census and the Small Business Administration. Large companies dominate exports. The top 500 U.S. exporters accounted for 60% of the value of all exported goods in 2007, according to the latest data available from the Census. Total U.S. exports, including goods and services, topped $1.5 trillion in 2009.

Federal "Hand-Holding"

Skeptics argue that federal efforts will have little effect because exports depend on foreign growth and the value of the dollar. But others say many small businesses that succeed in the U.S. just need some education and assistance to start selling abroad. "There are like-minded customers out there for almost any product category," says Tomas Hult, director of the International Business Center at Michigan State University. "If there's some hand-holding in that initial part of the process, we're going to see some results."

The biggest hurdle stopping most companies from doing business abroad is fear, says Fred Hochberg, chairman of the Export-Import Bank, a government agency that helps U.S. companies finance international trade through loan guarantees, credit insurance, and other support. "If you're a small business in New York and you're selling to Chicago, you know what the laws are, you know where the banks are, you know if you don't get paid you can sue," he says. "When you're selling overseas, those things aren't as clear."

Hochberg says Ex-Im, as the agency is called, can help small businesses by guaranteeing bank loans for foreign trade, making direct loans, and providing credit insurance so exporters get paid even if a buyer fails to pay. The agency has set a goal to increase export financing for small business to $6 billion this year from $4.4 billion last year. Ex-Im guarantees loans of any size, as small as $11,000 last year, and 88% of the bank's transactions were with small business exporters. Hochberg says Ex-Im is focusing on a handful of countries that are developing quickly, growing in infrastructure, and where the bank can help finance purchases: Mexico, Colombia, Brazil, Nigeria, South Africa, Turkey, India, Vietnam, and Indonesia. The SBA also offers export loan assistance and technical support at export assistance centers.

Foundation for Success

A prerequisite for selling abroad is success at home. Laurel Delaney, a Chicago-based consultant to small businesses seeking to export, says the typical company ready to expand overseas has $1 million to $15 million in revenue, a track record of growth, and the staff to handle new business abroad. Online marketing and e-commerce have also enabled more small businesses to expand globally. Shipwire, a Palo Alto (Calif.)-based company that provides outsourced warehousing and shipping for online merchants, opened warehouses in Canada in 2007 and in the United Kingdom in 2008, in addition to three warehouses in the U.S. Shipments to non-U.S. addresses have gone from close to zero in 2007 to 20% of Shipwire's business in 2009, says CEO Damon Schechter. "The merchants are pulling us to where we should be," he says.

Still, David Old's story shows why many small businesses are wary of selling abroad. Old had an insurance policy that guaranteed payment as long as he shipped in the period covered by his customer's letter of credit. During the financial crisis, however, as the value of the Korean won plummeted against the dollar, his buyer asked him to hold off on sending the last part of the order until the exchange rate recovered. Old says he trusted the buyer because he had made the earlier payments. By the time he shipped, the letter of credit had expired, along with his credit insurance. "I don't think the guy was a crook. I think the global economic collapse probably bankrupted him," Old says.

That experience isn't stopping him from looking abroad for new sales. He has prospects right now in Israel and Pakistan, and he's learning to speak Urdu. Old wants to grow his woodblock flooring business exponentially in the years ahead, and nearly all of that growth he sees coming from abroad. "The ability to access international markets via a simple thing called a container is huge," he says.

John_tozzi
Tozzi is a reporter for Bloomberg Businessweek in New York.

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