By Katie Bilek, Republic Capital Access
In a post-sequester environment, contractors are still focused on business as usual: RFPs, teaming, penetrating new agencies, staffing up new contracts. Their bankers, however, may be reading the headlines of the sequester with growing uncertainty. Lenders are increasingly focused on end customer exposure (which is correlated with potential loss of work or delayed task orders), heavier scrutiny of financial covenants (ie tightening underwriting requirements, including the capability to issue bid letters for larger contract proposals), and increased reliance on SBA guarantees to fill collateral short-falls.
It is not uncommon to hear a banker fret about his clients with less-than-mission-critical work or exposure to the Afghanistan drawdown, while others take comfort in their clients with cyber or security-related contracts. For government contractors who do lose work, this changes revenue composition – which may leave Accounts Receivables more heavily concentrated in specific contracts or federal agencies. It’s important for government contractors to have a conversation with their 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 the balance sheet can sustain a traditional credit line.
As awards are delayed and task orders pushed out, balance sheet stress has become more common, increasing the risk of triggering bank covenants. Even for companies who don’t use their Line of Credit, covenant requirements still exist. Though often the penalty for triggering a covenant is a fee or increase in interest rate, banks are increasingly kicking out their government contractor clients who experience a temporary set-back. The most common covenants are the Debt Service Coverage Ratio (the ratio of cash available to service interest payments), Debt/Net Worth, and Current Ratio (the measure of a company’s ability to pay short-term obligations). Non-bank financing can be covenant-free, expediting cash inflows to your balance sheet at around 1% per month.
As revenues come under pressure, lenders may look for other sources of collateral to secure a company’s credit facility. External investment accounts, real estate and residential property are lien-worthy options for lenders. Should external collateral not be sufficient for the bank, SBA guarantees can be used to supplement a business owners’ assets. However, an SBA guarantee is only appropriate for situations where a specified amount of capital is needed for operations. For rapidly growing contractors, an SBA loan may be a hindrance to expansion. A non-traditional lender can offer non-recourse financing of receivables with no personal guarantee, leaving your company and personal assets free of UCC filings.