Commerce Funding Corporation Government Contract Financing

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Commerce Funding CorporationGovernment
Contract Financing
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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.

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The Good NewsYour 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

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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.

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Solution

• Planning!

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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.
• Allows for proactive review of significant
  operational, personnel and financial impacts.
• 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

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Planning

• Prepare business plan/financing request/loan
  application
• Nature of Business/Company Profile
• Market niche
• Management brief summary
• Financing Request ( and terms)
• Use of Proceeds

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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
• New long term deal
• More restrictive loan covenants
• Higher interest rate
• Constraint as to other debt or leasing
  arrangements
• Additional guaranties or side collateral

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What do banks look for?

• 6 Cs of credit
• Cash Flow
• Consistency (of contracts and profits)
• Capitalization
• Collateral
• Competence
• Commitment

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Factoring/ A/R Funding

• The sale of your invoices, accounts receivable,
  to a bank or finance company (the Factor).
• Factoring will
• Advance a percentage, usually between 75 and
  90, of the invoice amount to the customer,
• The balance is refundable upon receipt of
  payment, less interest and transaction costs,
• Provide weekly or mid-month funding of unbilled
  accounts receivable,

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Factoring

• Cont
• 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.

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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
• provide financing for start-ups, 8a, minority,
  Native American, service disabled veteran, woman
  owned contractors, or companies that may have a
  questionable credit history.

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Factoring

• Cont
• 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 institutions financial
  strength is behind the client.

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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.

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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.
• Companys 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
  companys balance sheet or if they can be treated
  as off balance sheet items.

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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 SBAs
  primary business loan program to
• help qualified small businesses obtain financing
  not be eligible for business loans through normal
  lending channels.
• the agencys most flexible business loan program
• financing under this program can be guaranteed
  for a variety of general business purposes.  
• Loan proceeds can be used for most sound business
  purposes
• 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.ht
  ml

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• 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.

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• 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_at_commercefunding.com
  www.commercefunding.com