This is a guest post by Richard Lewis, Financial Engineering Counselors, Ltd.
When you work with the federal government, invoicing and payment cycles can be long. That typically means you will have spend money to do the work, before you’ve been paid for the work. This creates even more challenges when you’re the prime and you have to take care of your subcontractors as well.
In a previous post, we learned about some financing alternatives for federal contractors in this situation. Today, our guest blogger Richard Lewis is back to tell us about four more options. Richard is a government contractor financing consultant with Sterling National Bank.
Commercial financing/Asset-based lending – This is a common type of financing provided by most banks and commercial finance companies. The primary asset used in this type of lending is your company’s accounts receivables, although inventory, fixed assets, and in some instances, intellectual properties may be used to collateralize additional long-term financing requirements. With asset-based lending your credit worthiness, as well as your customers’, will determine the percentage of the receivables that will be advanced, usually between 75% and 90%. Inventory and fixed assets advance rates are most often significantly lower because these are less liquid assets. This financing is almost always provided on a revolving or an on-going basis, thus the term “revolving credit.”
Leasing and/or sale and leaseback – These financing alternatives can be used to generate capital from fixed assets that are to be obtained or currently owned by your company, such as computers, equipment, furniture and fixtures, vehicles, and real estate. Banks, financing companies, dealers, and manufacturers provide these more specialized services. The 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 loan – 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 when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes.
SBIR and grants – SBIR (Small Business Innovation Research) is a federal government program administered by 10 federal agencies for the purpose of helping to provide early-stage Research and Development funding to small technology companies (or individual entrepreneurs who form a company). Each agency has various needs and flavors of the SBIR program and you can learn more about them by visiting their sites: SBA, DoD and NIH.
None of the alternatives mentioned above are mutually exclusive. In many cases, combinations can be very effective. However, there are significant legal and operational differences in these financing arrangements. 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. Personal guarantees are virtually standard for all but the most credit worthy and/or public companies.
A note from Bill: TAPE’s own history mirrors the choices we’ve outlined in these two posts. First we did credit card financing that was tied to the company and our demonstrated cash flow. This is not really a recommended approach, but the bank was willing to extend limit that was limited in comparison to our current line of credit, but seemed big at the time.
Next we converted to factoring and followed that through two separate vendors, one of whom we still maintain cordial relations with. Finally, several years ago, our CFO obtained bank line of credit financing, and we’ve been there ever since, through three separate banks.
Richard Lewis is a consultant with Financial Engineering Counselors, Ltd. FEC is a diverse financial advisory firm that assists government contractors in obtaining their working capital needs. You can contact him at 703-992-8988.