Government Contractor Working Capital
Government contractors are any company that is operated privately or publicly traded but not state-owned enterprises—either for-profit or non-profit—and their products and goods are sold under contract for the government. These contractors do business with the single largest buyer of goods and services in the world, The Federal Government of the United States. Furthermore, there are major characteristics that distinguish government contractor businesses from private sector contractors. The first being, they operate in some laws, regulations, and policies which encourage competition to the max to ensure proper spending of taxpayer money and advance socioeconomic goals. Second, their contracts contain mandatory clauses, affording to the Government’s contractual rights. Third, due to the Government’s unique status as a sovereign entity, claims and litigation go by the different procedures of the Contract Disputes Act. Overall, being that Government contractors are particular about how it purchases products and services its primary objective is to ensure competition is fair and open. Products and services are wholly priced, and the government gets what it pays for in return.
Quick-jump to the following sections:
- Bank Loans
- Bank Line of Credit
- Unsecured Line of Credit
- SBA Loans
- Accounts Receivable Financing
- Cash Advance
Bringing us to 2018 for Government contractors, they are working with about $500 billion spent annually at the federal level on goods and services, suggesting there is plenty of room for all types of businesses to have a profitable year from government contracts. Many companies are finding that it is their secret weapon for profits. For instance, half of the government contractors reported that their profitability rose as a result of federal contracting. Thus, certain trends are vital to consider for government contracting businesses in 2018 to secure that companies are prepared for the year ahead. Such as the changes to the NDDA (National Defense Authorization Act). The NDDA impacts government contractors directly as changes concerning set-asides are meant to motivate the federal government to diversify its contracts. Among the changes, NDAA will now require companies to establish small business government subcontracting goals to push for more significant opportunities for small businesses to win and perform on contracts. Another trend revolves around enterprises preparing for weather disasters; If companies learned anything from 2017 and currently, planning for emergencies is an integral aspect for a business of any size. From earthquakes to wildfire to snowstorms, weather patterns over the last year have agitated government contractors across the country. Reports have shown that extreme weather caused $306 billion in damage nationwide in 2017. Thus, government contractors should take time to create a disaster plan and appoint an Emergency Project Manager to make sure work can still get done in event of unforeseen circumstances.
The modernizing Government Technology Act of 2017 has been creating change by shaping information technology obtainment. The products that will come from this act will improve efficiency, cut costs, eliminate duplicative programs, and reduce risks. Contractors will see a technology emphasis on cybersecurity, shared services, commercial off-the-shelf- software, agile development, cloud migration, and data-center consolidation creating more obligations for the contractors in 2018. Opportunities for audit services will bloom too. The government must prepare a set of books; however, the biggest problem has been that the Defense Department hasn’t been able to do so. It plays out this way since the government’s financial management results in statements that can’t be audited until now. The Pentagon began preparing their first financial audit last year, meaning contractors with auditing expertise will have more business opportunities with Defense. Furthermore, another trend of 2018 for government contractors is the growth of mid-tier companies. Also, defined by their annual revenue between $25M and $500M, these companies will address structural procurement barriers including team restriction which will lead to expanded opportunities in the federal market and business growth.
Thus, the next trends are centered around schools and homeland security. The Department of Homeland Security’s increase of $5.4 billion over the last year has many of these dollars spent in the form of contracts to bolster infrastructure and improve surveillance technology. Other commitments will be focused on energy, water, and certain critical facilities. All are coming to fruition as the Presidents campaign promises to modernize infrastructure is beginning to gain traction. Moreover, high profile tragedies have riveted the nation’s focus on helping to protect children and to promote safe learning environments. Therefore, the Act provides more than $2.3 billion to new funding for threat identification, mental health, training, and school safety programs at the Departments of Justice, Education, and Health and Human services. Lastly, eliminating regulations that are onerous, duplicative, or outdated has been another essential trend for government contractors to provide the best and most efficient services.
Types of Government Contractor Loans
Bank term loans are the most affordable type of financing available for government contractors. Conventional lenders simply offer the best rates, longest terms, and lowest fees of all business lenders – especially for government contractors. The main reason banks and other conventional lenders are able to offer such good rates for their term loans is because they require excellent credit, strong business financials, and potentially collateral.
Secured Line of Credit
A line of credit is a type of preapproved financing that allows government contractors to access funds whenever they need it, whether it be for a new project, usual business expenses like payroll, emergency expenses and all other working capital uses. A secured line of credit through a conventional lender is almost always secured by the company’s accounts receivables and unpaid invoices.
Unsecured Line of Credit
An unsecured line of credit is different than a secured line of credit, in that it doesn’t require collateral. But, to get approved you’ll need to have exceptional credit. Unsecured lines of credit can come in the form of a true line of credit, or as a low interest business credit card (often 0% APR for the first year).
|Rates||0% for 12 months|
|Collateral||Not be Required|
SBA loans are a very good option for government contractors who desire true bank-rate financing, but have been unable to get approved for a term loan or line of credit from a large bank, small bank, community lender or credit union. SBA loans are provided by conventional lenders, but the government agrees to cover most of the lenders’ losses should the government contractor default on the loan. By offering this guarantee, the lenders are more inclined to provide financing to borrowers who have good credit and financials, but were still declined for a conventional loan.
There are a couple ways for a government contractor to acquire equipment. One option is to take-out a loan and use the proceeds to purchase the equipment. Another option would be for the government contractor to simply lease the equipment. By leasing the equipment, the contractor is able to acquire the equipment without paying the full-price, upfront. When the lease term is completed, the contractor will be given the chance to simply renew the lease, buy the equipment, or give it back.
Alternative loans are a way for government contractors to get a quality business loan should they not qualify for more conventional options like bank terms loans or SBA financing. While an alternative loan has rates that are higher than bank loans, they are still very affordable, and can fund much easier than traditional lending options.
Accounts Receivable Financing
Accounts receivable financing and factoring are a way for a government contractor to access a line of credit using the companies accounts receivable. A/R lines of credit use the companies unpaid invoices as collateral, whereas factoring involves the government contractor outright selling their unpaid invoices to a funder at a discount.
Government Contractor cash advances are a form of alternative financing that provides the contractor with immediate financing without the underwriting hassles of a conventional loan. In fact, a cash advance isn’t a loan at all, but instead it’s the sale of the government contractors future revenue in order to access such revenue immediately. While 95% of contractors will be approved for a cash advance, the easy access has a trade-off in that the rates are higher than all other business financing options.
|Factor rates||1.10 – 1.50|
|Fees||Low to High costs|
There are plenty of financing options for government contractors seeking working capital loans for their business operations. Whether the uses be for payroll, hiring employees, making purchases/paying for expenses, emergency funds, there are options available for nearly any credit type and business size. If you are a government contractor seeking financing for your company and need help understanding your options, please reach-out to one of our financing specialists and we’ll have you navigate the process.