Commerce Funding Corporation
“Government Contract Financing”
Amy Horn 1945 Old Gallows Road Vienna, VA 22182-3931
Phone:
Fax:
800.899.8886 Ext. 246
703.893.3257
Email:
Web:
ahorn@commercefunding.com
www.commercefunding.com
No one plans to fail. But many fail to plan.
“While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you are starting a business or expanding one, sufficient ready capital is essential. However, it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.”
The Good News:
Your Company has landed a new Government contract, one that will result in a significant increase in revenues.
The Challenge:
In order to fulfill the contract you must commit to additional:
People (payroll) Training Materials And related costs
The Challenge:
Timing: Before payment is received from the government.
Working capital needed to cover commitments exceeds:
Cash on hand Existing line of credit Availability of credit card Delayed payments to selected vendors
The nature of this contract might justify issuing new equity or debt, but raising capital generally is an expensive, complex task that ultimately may take too long to meet your short-term contract specific capital requirements.
Solution:
Planning!
Planning:
Minimize risk of having to scramble to raise enough capital to ramp up for future major contracts:
Internal business development forecasting should identify and signal situations to senior management.
o Allows for proactive review of significant operational, personnel and financial impacts. o Allows for contract negotiations with government or prime: • Invoice payment terms • Extended delivery dates • Partial payment upon order placement • Progress payments based on specific performance criteria
Planning:
Prepare business plan/financing request/loan application
o o o o o Nature of Business/Company Profile Market niche Management brief summary Financing Request ($ and terms) Use of Proceeds
Traditional Bank
If your company has an arrangement with a bank or lender, approach bank or lender as far in advance as possible and try to negotiate an increase. Remember, LENDERS HATE SURPRISES!
If you are in good standing, a responsive lender may provide short term capital until the government pays. Trade-offs for an increased facility:
o o o o o New long term deal More restrictive loan covenants Higher interest rate Constraint as to other debt or leasing arrangements Additional guaranties or side collateral
What do banks look for?
6 C’s of credit • Cash Flow • Consistency (of contracts and profits) • Capitalization • Collateral • Competence • Commitment
Factoring/ A/R Funding
The sale of your invoices, accounts receivable, to a bank or finance company (the “Factor”).
Factoring will:
1. Advance a percentage, usually between 75% and 90%, of the invoice amount to the customer,
2. The balance is refundable upon receipt of payment, less interest and transaction costs,
3. Provide weekly or mid-month funding of unbilled accounts receivable,
Factoring
Con’t
“Term loans” for multi-year contracts, and Mobilization financing for new contracts, Notify the Federal Government agency customer, through the Federal Assignment of Claims provisions, that the invoice has been financed and is payable directly to them.
4. 5. 6.
Factoring
Adantages:
most of the A/R bookkeeping, customer credit worthiness, collections, and credit risk become a shared responsibility with the Factor, and the initial approval process can usually be a matter of days. credit criteria is based on your government customer, the federal, state, or municipality
o provide financing for start-ups, 8a, minority, Native American, service disabled veteran, woman owned contractors, or companies that may have a questionable credit history.
Factoring
Con’t
Although it may be more costly, it is a viable alternative to traditional bank financing because of its increased flexibility.
Additionally, to help obtain a contract, Factors provide a “financial support” letter, submitted with the proposal, to the Government agency insuring that their institution’s financial strength is behind the client.
Contract Financing/Purchase Order Financing
Negotiate financing based upon your Federal Government customer Purchase/Work Order(s). Based upon the credit worthiness of your customer (in this case the US Federal Government). Easiest when your products or services are well established. If products are new, services are non-standard and/or unproven, PO more difficult to obtain. Effectiveness of Contract/PO financing in a pre-revenue ramp up situation will be determined by how soon you can invoice.
Leasing and/or Sale and Leaseback
Used to generate capital from fixed assets that are to be obtained or currently owned by company, such as computers, equipment, furniture and fixtures, vehicles, and real estate. Banks, financing companies, dealers, and manufacturers provide these more specialized services. Company’s credit standing and the quality of the assets involved will determine the amount of cash that can be raised and the terms under which it is provided. Specifics of the agreement will determine if these leases have to be reported on your company’s balance sheet or if they can be treated as “off balance sheet” items.
SBA Loans
The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.
The Basic 7(a) Loan Guaranty serves as the SBA’s primary business loan program to:
help qualified small businesses obtain financing not be eligible for business loans through normal lending channels. the agency’s most flexible business loan program
o financing under this program can be guaranteed for a variety of general business purposes.
Loan proceeds can be used for most sound business purposes
o o o o o o working capital machinery and equipment furniture and fixtures land and building (including purchase, renovation and new construction) leasehold improvements, and debt refinancing (under special conditions).
Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.
http://www.sba.gov/financing/sbaloan/snapshot.html
Conclusion:
None of the alternatives mutually exclusive. Combinations can be very effective. Be Aware: significant legal and operational differences. The terms of some borrowing agreements may limit your ability to take on additional debt and they should be entered into only as part of a coherent financing strategy. Do not be alarmed when the lender asks for your personal guaranty.
For questions or additional information, please do not hesitate to contact:
Amy Horn Commerce Funding Corporation 1945 Old Gallows Road, Suite 205 Vienna, VA 22182
800.899.8886 ext. 246 ahorn@commercefunding.com www.commercefunding.com