Financing Trends for Government Contractors
It is no secret that commercial banks are less likely to provide credit to small and medium-sized business than in the past, and government contractors are certainly not immune to this trend.
For those companies in need of working capital (read more)
Preparing for 2013’s Financial Headwinds
As NeoSystems’ CEO, Michael Tinsley, wrote in September, having a contingency plan in uncertain economic times is imperative. While every plan should consider the implications on your company’s balance sheet, you also need to account for the potential of losing work, the triggering of debt covenants, and the tightening of underwriting requirements by banks.
Losing work – Government contractors, especially smaller ones, are seeing work disappear – sometimes due to losing a contract or because larger prime contractors are taking work back in-house. In a recent Washington Post article, an executive from a 300 employee Alexandria-based defense contractor said she didn’t appreciate how nervous many large contractors were until one of her prime contractor partners chose to take the business back.
Losing work means a change in revenue composition – which may leave your Accounts Receivables heavily concentrated in specific contracts or federal agencies. It’s important to consult with your lender in anticipation of any contract loss as receivable concentration is often a reason for decreasing credit availability. An alternative is to sell individual receivables until your balance sheet can sustain a traditional credit line.
Triggering covenants – As contracts are delayed, balance sheet stress will become more common, increasing the risk that you may trigger one of your bank covenants. In the same Washington Post article mentioned above, the Vice Chairman of a McLean-based contractor said: “We’re losing a lot of financial flexibility with banks and other organizations”.
Even if you don’t use your Line of Credit, covenant requirements still exist. The most common are the Debt Service Coverage Ratio (the ratio of cash available to service interest payments) and Current Ratio (the measure of a company’s ability to pay short-term obligations). Often, the penalty for triggering one of these is a fee or increase in interest rate. Non-bank financing can be covenant-free, expediting cash inflows to your balance sheet at around 1% per month.
Tightening Underwriting Requirements – As revenues come under pressure, your lender may look for other sources of collateral to secure your company’s credit facility. External investment accounts, real estate, and residential property are all lien-worthy options for lenders. Non-traditional lenders typically offer non-recourse financing of receivables with no personal guarantee, leaving your company and personal assets free of UCC filings.
Preparing for the worst-case scenario means having the right partners who understand your needs as a government contractor, helping your identify potential problems before your business is affected. That’s an investment every partner should be willing to make.
Katie Bilek is Senior Vice President of Republic Capital Access.