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Defense Contractor Loans: Financing for DoD Contractors

Defense Contractor Funding

The global industry responsible for the sales and manufacturing of weapons and military technology is widely known as the defense industry. It consists of a commercial sector accountable for research and development, engineering, production, and the servicing of military equipment and facilities. The materials are then distributed by arms-producing companies, referred to as arms dealers or defense contractors. Individual departments of government also operate in the arms forces, buying and selling weapons, and other military items. These items are then usually stored in an arsenal, a place where you can find arms and ammunition being made, maintained and repaired, stored, or issued in any combination. Moreover, as with most industries, there are methods used that are keeping it stable and thriving but also factors that may cause shifts or declines. Such as how military budgets continue to tighten in the traditional big markets and emerging nations are making an effort to protect themselves. Thus, defense contractors, traditionally based in the United States or Western Europe, have begun looking into new places for customers. Therefore, the shift requires milestone changes in the way defense companies approach new business and conduct their customer relations.

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Perhaps the most notable challenge is how defense contractors increasingly have to negotiate on a country-by-country basis. Before, the U.S. and its great allies had most of the control over who buys weapons and how much equipment they can cache. Now, individual nations are making these decisions for themselves as they are becoming more informed and comfortable with navigating their defenses. Each country has its unique histories, politics, alliances, and economic goals, and are using their experiences and everyday reality to imprint their own contract negotiations. Hence to continue thriving in this environment, contractors must no longer rely on the standard framework that was put before, in which a U.S.—based defense establishment, for instance, does trade with a foreign country only as an exporter of goods. Instead, defense contractors will be building tighter relationships with more countries.

These activities will include assessing each market separately, deciding which are appropriate to do business with, and creating programs tailored to each country for business growth, technical assistance by local businesses, and lasting investment. In particular, doing so will be most crucial for U.S. contractors whom to some extent are crippled by the strong dollar. Since U.S. products are becoming more expensive than comparable equipment created in non-dollar denominated countries, and as a result, the U.S. will have to in a way, sell cooperation and collaboration as a valuable asset that will make it worthwhile and economical for foreign customers to access U.S. military equipment and technology.

Accordingly, for contractors in the defense industry to succeed—framing their approach in response to an ever-growing diverse landscape of multiple markets may be best. Contractors should be thinking long-term as investments and partnerships in the current economy is now a demand for doing business long before any defense contract is signed. The days when a business could merely show up and bid on a fruitful contract are gone. To now get access, companies have to demonstrate assurance to the military and industrial base as well as a willingness to transfer technology skills in advance. This type of investment might be ten years or more, and some companies will struggle to justify the expense, but it stills stands as a winning strategy for some contractors.

Lastly, contractors must develop relevant capabilities and find a way to control cost the best way possible. To evolve from export and transactional work model to a localization approach, meaning the process of adapting a product or content to a specific locale or market; contractors will need to strengthen some of their abilities and develop new ones. For example, defense contractors must be able to cooperate with and regional train companies they partner with; this is to make sure that components and parts acquired regionally are built to the same specifications and standards that the defense contractor is acclimated to in other parts of its supply network. This approach can become hard work, yet it will create a more efficient workforce and environment. Furthermore, the cost is also crucial for continued success in the defense industry. Moreover, although defense contractors can turn to developing countries for new contracts, lower commodity prices and things in the like, it is still essential to have other strategies. Meaning, contractors should be cost competitive wherever they seek markets. Since Western countries workforce is steadily aging and thus has a scarcity of skilled A&D workers driving up cost, it would be smart for contractors to form meaningful joint ventures in developing nations.

Defense Industry Financing Options

Defense contractors and general government contractors may find themselves in the need for capital to help with existing business operations, or to help expand their contracting business. Some of the financing uses a defense contractor may use additional capital for include acquisitions, refinancing and consolidating business debt, new senior or subordinated debt, as well as overall contracting working capital (especially to help with supplies, inventory and payroll). Below we’ll take a look at some of the financing options available to defense contractors.

Conventional Bank Financing

True conventional bank lending facilities offer the most affordable type of financing to middle-market and small businesses. On top of having the least expensive type of commercial financing, they also provide the longest terms – which allows a business to debt-service their loans easier, allowing for better cash flow than a shorter-term financing facility will offer. But to qualify for conventional bank facilities, your company will need to show good profitability and a strong balance sheet. Having plenty of short-term A/R will also go a long way toward getting approved. Additionally, bank financing facilities for defense contractors will require substantial paperwork and documentation during the due diligence process.

Rates 5-15%
Terms 1-30 years
Funding Amounts $50,000-$50,000,000
Collateral Required
Fees Medium costs

 

Accounts Receivable Financing

Leveraging your defense contracting business’s accounts receivable is an excellent way for the company to access working capital financing to aid with business operations. A/R financing is a form of asset-based financing in which a lender provides a line of credit to the defense contractor using the company’s A/R as collateral. The receivables aren’t actually sold to the lender, but they will monitor the accounts receivables monthly or quarterly, and adjust the facility depending upon how much A/R is available.

Rates 0.5-2.5%
Terms 1-3 years
Funding Amounts $250,000-$10,000,000
Collateral Required
Fees Medium costs

 

Factoring

Factoring is like accounts receivable financing, in that it is a type of asset-based financing in which a lender will use the defense contractor’s A/R as the basis for financing. But whereas an A/R line of credit doesn’t involve the actual sale of accounts receivables, factoring requires the actual sale of the receivables to the factoring company. A factoring company will purchase the receivables at a discount to the defense contractor, forward a large percentage of their invoice’s value to the defense contractor, and then release additional funds after the invoice is fully-paid.

Rates 0.5-2.5%
Terms 1-10 years
Funding Amounts $10,000-$5,000,000
Collateral Required
Fees Medium costs

 

SBA Financing

Defense contractors (and just about all government contractors) can take advantage of the U.S. Small Business Administration’s loan program to obtain affordable capital that they may not have qualified for without the SBA enhancement program. SBA loans are conventional loans provided by banks and community lenders provided to small businesses with good credit and solid profitability that are unable to get approved for conventional bank financing. But to qualify for a SBA loan you must meet the Small Business Administration’s definition for a small business.

Rates 5-8%
Terms 3-25 years
Funding Amounts $50,000-$5,000,000
Collateral Required
Fees Medium costs

 

Equipment Financing

Military and Defense contractors are reliant upon having the best equipment to help their business run effectively and efficiently. But, sometimes such defense contracting equipment can be extremely expensive – too expensive to purchase out-of-pocket. Sometimes a contractor may find it best to take-out a business loan to purchase their equipment, but other times it may be easier to lease the equipment, so as not to have to pay the full-price of the equipment upfront. Additionally, by leasing the equipment, the defense contractor may not be stuck with outdated equipment after a couple of years, and they can simply end their lease and upgrade the equipment.

Rates 7-15%
Terms 1-10 years
Funding Amounts $50,000-$50,000,000
Collateral Required
Fees Medium costs

 

Bridge Financing

This type of short term defense industry financing is meant to be used for business operations until either a senior financing facility is secured, or as a gap between payments from customers to bridge your responsibilities. Bridge financing for working capital is generally very short-term and has a higher interest rate than more conventional types of financing. But the advantage of bridge financing for working capital is that the requirements are not hard to meet, and funding can be completed in a matter of days with few documents needed.

Factor rates 1.10 – 1.50
Terms 3-24 months
Funding Amounts $5,000-$2,000,000
Collateral Not required
Fees Low to High costs

Summary

While these are the main defense contracting business loans, they are not by any means the only options. In fact, the financing options available to defense contractors are plenty, with many different structures. Understanding your financing options are important to make sure your company gets the lowest rates and best terms available. If you are a defense contractor looking to obtain capital for operations, and need help securing the best possible loan, please reach-out to one of our funding specialists, and we’ll help you navigate the process.

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About the author
Domonique Cox

Domonique is a Minnesota native that earned her bachelors from The University of Arizona with a degree in English and Film Studies. Though books and writing are not her only interest, you can find her engaging in nutritional sciences, environmentalism, vegan cuisine, filmmaking, old school dancing, tennis, running, sound engineering, and enjoying satirical dark comedies or listening to the poetic lyrics of Bob Dylan. She is now based in Los Angeles as a content writer for GUD Capital where she spends her spare time honing her writing and directing skills. 

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