Column: Financing Alternatives for Government Contractors

      Being a small or midsize business, regardless of whether your company is a commercial or government contractor, and whether a prime or subcontractor, most of us have experienced cash flow headaches. Some of the more recurring pain points are:

• When meeting payroll weekly or biweekly, or on the 15th and 30th before there is an invoice;
• When working capital hinders ability to bid on more or larger contracts; or
• When the need arises for purchase order financing.

      As a government contractor, you probably have experienced the situation that it takes two payrolls before you can invoice and Uncle Sam is not always as fast in paying as we would like. Although it's not quite as laborious on the commercial side, "Payroll Pain" is always an issue for small business.

      There are several alternatives outside traditional banking to enhance working capital and support cash flow needs: personal investment (savings, retirement, mortgage, borrowed), credit cards or gaining equity to generate the needed cash flow. However, many contractors are unaware of the 'alternative resources' available, and they don't have working experience with how these resources may be employed as a business finance solution. Or, being unfamiliar, they are just reluctant to use them.

      When you approach your banker, he/she says: "Gee, we would love to help but your company hasn't been in business long enough, is too highly leveraged, or hasn't had two successive years of profitability." Where do you go to get funding for working capital: payroll, accounts payable, and support to bid on those larger contracts?

      It's a perilous time, a time to consider the alternative financing sources and to see who will work with you to secure the most advantageous alternatives for your specific situation. Here are some options:

      Accounts Receivable Finance (Factoring): Look for well-established bank and non-bank finance companies. They can provide:

• Approval and funding in as little as 10 business days;
• Up to 90% advance on that value of government invoices at rates that can be more reasonable than local, retail commercial banks;
• Weekly or mid-month funding of unbilled AR;
• Larger values of lines of credit;
• Domestic and International (non-U.S. customer) invoice funding; and
• For some financings, no personal guaranty is required.

      Commercial Financing - Asset Based Lending (revolving credit or borrowing-based lending). This is usually based on:

• 70% to 90% of eligible accounts receivable; or
• Inventory, fixed assets and intellectual property.

      Because this is a loan, not an invoice purchase, the credit worthiness of your company is more important than accounts receivable financing.

      Payroll Financing. Several established lenders provide Money Only, ABL and Factoring programs (for companies that have payroll software or a payroll service company) or Full Service Payroll Funding (for companies wanting payroll software, back office support and funding, including tax payments). These services are available for startups and companies that would like a complete payroll and financing bank relationship:

• Payroll processing and payment, funding, and payments of withholding and payroll taxes; and
• Mid-month funding of payroll and gross profits, a full service that can include invoicing clients and invoice collections.

      Purchase Order Financing or WIP

• Based upon provisions of a government contract or work order;
• Easiest when products or services are well established;
• Used for pre-revenue ramp up; and
• Can include both domestic and foreign vendors.

      Credit Cards - Level 3 and/or Merchant Financing

• Level 3 credit cards are soon to be mandated by the Federal Government and they have characteristics that make them desirable for you as well as the government. (Most importantly, processing this choice could save you processing costs of between 30% - 40%).
• Merchant financing of around 50% can be available as soon as you make the sale;

      Small Business Administration (SBA) has a multitude of programs, through approved lenders, for small businesses:

• Working capital and real estate loan programs; and
• Surety Bonds.

      Conclusion: There are numerous financing alternatives which can assist in growing your company. However, something to keep in mind is that none of the alternatives are mutually exclusive. Just keep in mind that combinations can be very effective.

      However:

• There are significant accounting, legal and operational differences;
• Don't be alarmed when the lender asks for your personal guaranty; and
• Terms of some borrowing agreements may limit your ability to take on additional debt and should be entered into only as part of a coherent financing strategy.

Richard Lewis has assisted small businesses, and specifically government contractors, for over fifteen years. You can reach Richard for a no-charge consultation at richard@fecltd.net, 703.992.8988 or check him out at www.linkedin.com/in/richardlewisdc.

Cardin, small contractors push key amendments to FY21 NDAA

Senate panel OK's NDAA for FY2021

Small biz utilization drops in gov-wide Best-In-Class awards

8(a) STARS II ceiling raised

Judge backs ANCs for aid

Updated Coronavirus Resources for Small Business Federal Contractors

'Main Street' lending set up

NDIA survey

Column: Financing Alternatives for Government Contractors

Washington Insider: