Filling a Void

After enduring one Latin crisis after another, most U.S. trading companies have died off. Leawood however, is thriving.

WHEN EUPHONIX, A PALO ALTO, California-based manufacturer of sound and recording equipment, wanted to expand its market, it didn't think small.

The company, which generates annual sales of just over US$15 million, decided to head south--to Rio de Janeiro, to be exact. One of Brazil's largest recording studios, Clausferma Servicos e Locacao de Equipamentos, better known as Cia. Dos Tecnicos, wanted to buy $475,000 worth of Euphonix' products.

But how does a mid-sized manufacturer with no real experience in cross-border sales find trade financing for an export order worth almost half a million dollars? "You go to any finance company in the States and start talking about export financing, and the line goes dead," says Dave Christenson, Euphonix' director of international sales. "They don't want to hear about it."

Leawood Export Finance, however, was all ears. This past May, the Overland Park, Kansas-based trading company managed to obtain a trade finance guarantee for Euphonix' equipment from the Export-Import Bank of the United States (Ex-Im Bank), allowing the company to make the sale.

While trading companies are commonplace in Europe, Asia and Latin America, they all but died off in the United States several years ago. Leawood is one of just a few such firms left operating. "Between 1965 and 1980, you had a large number of companies like Leawood," notes Bill Redway, group vice president for small business at the Ex-Im Bank. "But after the Latin American debt crisis, they were all gone."

Trade abhors a vacuum. Leawood's approach is simple: Find small firms of 75 to 100 employees with one or two exportable product lines, then either purchase their goods and find markets abroad or undertake the risk involved in exporting them to buyers identified by the manufacturer. Small firms can thereby export their goods without risk. "They [the small firms] are so focused on producing the product that they're looking for people to partner with," says Kathleen Williams, a principal at Leawood.

The disappearance of trading companies in the U.S. has created a void-- something that Leawood has been able to exploit, according to Robert Duncan, 56, the firm's president and majority owner. "Our market research shows there is very, very strong interest in this," he says. "Leawood has a number of tentacles out there, and we're using them as a basis to grow our business."

One of those tentacles is Leawood's El Paso Texas-based subsidiary, TerraMar. The company sells a number of items, including metals, medical supplies and equipment, to Mexico. "Mexico is a huge market for medical supplies," Duncan says.

Latin America in general has been a major market for Leawood--and growing. The firm's sales have taken off over the last several years, from $4 million in 1996 to $6.7 million in 1997 to $10 million last year--95% of which comes from trading with Latin America. Duncan estimates that total export sales this year will reach $20 million, the majority of which will come from the region. Williams says doubling the company's sales has been fairly easy. "Nobody's in our space," she says.

Small fry champion. Leawood makes money one of two ways. If it has to find a buyer for the merchandise, it charges a mark-up of between 5% and 20%. If the supplier already has a buyer but needs financing, Leawood simply adds a handling fee based on the volume and the terms of the financing. And despite the risks of operating in the region, Duncan says the firm has never been stiffed; it's always found a buyer for the merchandise it's brokered or financed.

Those who work with Leawood say the company's approach is its greatest strength. "The kind of business that Bob [Duncan] does is very good for small businesses," Redway says. "He's linking up with small U.S. manufacturers and Latin buyers. Ex-Im Bank is eager to expand into that sector."

So eager, in fact, that Leawood is the only non-bank to have received a master guarantee from the Ex-Im Bank. This allows Leawood to provide overseas buyers with financing of up to $10 million, with terms lasting up to seven years. Despite Leawood's relatively small size, Duncan says it is the 51st-largest user of Ex-Im bank guarantees and the 12th-largest user of Ex-Im Bank export insurance.

Because of its focus, Leawood has opened up the export market to the small fry. Fortune 500 companies have tended to dominate American exports because they are large enough to handle their own trade financing and negotiate their own guarantees. But smaller firms don't generate the kinds of export orders that large banks want to finance, and many smaller banks able to underwrite trade of less than $5 million don't know how to do it.

Gary Mendell, president of Los Angeles-based Meridian Insurance Group, which brokers insurance to cover export payments, says he spent several years looking for a company like Leawood--one that could help smaller firms looking to break into foreign trade. He discovered the firm by chance after he and Duncan were both slated to address a trade conference. "They [small firms] really need somebody to do more than just set up some systems internally," Mendell says. "They really need somebody to take it over and handle everything from soup to nuts."

Going online. Duncan started several decades ago in the export business, handling distribution and financing for Caterpillar. He left in 1978, having watched the Latin debt crisis lead to a precipitous drop in exports from the United States, which killed off the trading companies.

But Duncan found that most of these companies were set up by banks. As the Latin countries began having troubles servicing their debts, and trade levels dropped, the clash of cultures between the risk-averse banks and their risk-taking trading-company subsidiaries became more and more apparent. So he started Leawood seven years ago to help small companies that couldn't find financing to export their product.

Despite having very little competition, the company isn't sitting still. It expects to have an e-commerce web site up in January that will allow potential overseas buyers to view the products available and even submit their credit applications over the web. The site will be in English and Spanish, with Portuguese added later. Says Duncan: "We've found a niche, we're developing a market and we're growing from it."

Euphonix' Christenson is glad he hooked up with Leawood. Before, the company was losing business to British competitors, which were able to arrange financing through a government export guarantee program. "We were very often coming up short because we couldn't offer instant, in-house finance," he says. It allows us to compete on a more level playing field."

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