financing government contracts
DESCRIPTION
10th Annual Defense Trade ShowTRANSCRIPT
WORKING CAPITAL BASICSFINANCING GOVERNMENT CONTRACTS
North Carolina Military Business Centers
10th Annual North CarolinaDefense Trade Show
August 9, 2011
NON-BANK FINANCING OPTIONS
Purchase Order Finance
Accounts Receivable, Inventory, and Term Loans (ABL)
Factoring
PURCHASE ORDER FINANCING
Requires a PO from government or other commercial or institutional entity
Normally requires an accounts receivable financing or factoring facility in place
Pricing is normally 18% to 36% per annum This is NOT mobilization finance – must have an ongoing
businessSources Include:
Wells Fargo Trade FinanceHartsko Financial ServicesClaro Trade FinanceInnovare Capital
ASSET BASED LOANS
Focused on the value of assets – not balance sheet and P&L
Typically underwrite assets as if in a liquidation scenario
Borrowers often anticipate a much greater loan to asset value than they actually receive
ABL REVOLVING LOANS
Accounts Receivable are always the most preferred collateral for revolving loans
Most easily tracked and most easily liquidated in a worst case scenario
Closest to cash and most easily converted to cash
To Finance federal government accounts, the lender must have an assignment of claims from the government on a contract by contract basis
ACCOUNTS RECEIVABLE ADVANCE RATES
Receivable advances are dependent largely on “dilution”
Dilution is the aggregate of returns, allowances, bad debts, discounts and other items that decrease the net value of receivables
The higher the dilution factor, typically the lower the advance rate
ACCOUNTS INELIGIBLE FOR BORROWING
Over 90 days from invoice 25% or more of the account is over 90 Customers with bad pay history Contra or offsetting accounts Related company accounts Consumer accounts Officer or employee accounts Foreign accounts without letters of credit Excessive concentrations of credit
INVENTORY BORROWING
ABL’s struggle with inventory lending
Can be very difficult for a lender to sell in a liquidation scenario
Goods can quickly become obsolete
Inventories can deplete quickly
DON’T EXPECT A LOT FROM INVENTORY!
Long history of lenders losing money liquidating inventory
Lenders typically cap inventories at a fraction of the total lending facility
Lenders often rely on orderly liquidation value appraisals by a third party
TYPICAL INVENTORY ADVANCES
Many borrowers expect 50-60% on ALL inventory
Most get 25-40% on ELIGIBLE inventory, sometimes less
Lender may propose 50% of cost or 80% of OLV whichever is less – guess which is always less!
Advances are often capped at 50% or less of total loans
INELIGIBLE INVENTORY TYPES
Stale or obsolete items Packing supplies Work in process Inventory for internal use – not sold in the normal course Offsite inventory Inventory at customer location Bulk storage inventory Very rapidly turning inventory Customer specific inventory Branded inventory – may require licensing
ABL TERM LOANS
Normally only made in conjunction with a revolver
Made as an enhancement to revolver Fixed amortization but a floating rate Normally 50% or less of total lending facility
TERM LOAN TYPES AND ADVANCE RATES
Normally restricted to plant equipment; sometimes rolling stock
Turnaround companies can get M&E loans, but valuation is Net Forced Liquidation Value
Lender will advance 70-80% of NFLV Amortization is normally 24 to 60 months
REAL ESTATE
Asset based lenders typically lend very conservatively on real estate
Advance rates of 25-50% of quick sale value are normal
Amortizations of less than ten years are typical Normally only for asset based loans larger than
$10 million in total
CREDIT AND COLLATERAL ISSUES
The following issues are interrelated They are key elements in the credit decision They are carefully considered by lenders
INDUSTRY CONSIDERATIONS
Some industries are not a good fit for an asset based loans
Usually has to do with the nature of the industry’s billing practices or customer base
FACTORING
Formerly factoring was used as a trade credit and finance vehicle
Modern recourse factoring is used as an alternative to bank or asset based finance for new, more distressed, or smaller companies
Factor actually purchases your invoices, with recourse back to you if the account debtor does not pay. The invoice is “put” back to the client when it reaches 90 days old.
Pricing is higher, but factors can often finance companies that banks and ABL’s cannot
FACTORING REQUIREMENTS
Must provide invoice(s) and supporting documentation
Typically need assignment of claim from federal government
Collection of accounts will go directly to factor You can factor all or part of your accounts
FACTORING ADVANTAGES
More aggressive credit approach – financing for new companies, high-leverage companies, companies losing money, tax liens, and other major structural problems
Finance all or part of your accounts receivable Quick turnaround – usually less than a week Short contract period – sometimes no contract or a
year or less
FACTORING LIMITATIONS
Normally will not lend on inventory, equipment, or real estate
Full notification of customers is normally required Pricing is normally 14% to 30% or more Must provide copies of all invoices and supporting
documentation Watch out for pricing tricks, add-on fees for slow
paying invoices, etc.
GETTING LENDER TO SAY YES How you present your loan request matters Keep it simple, make it complete Provide basic information on the business,
history, ownership, etc. Avoid long detailed discussions of the
company’s business or future plans – No “blue sky” discussions
Put the bad news right up front
KEY ELEMENTS OF THE LOAN PACKAGE Summary of your sources and uses of funds Accounts receivable aging Accounts payable aging Last three years financials Most recent interim and prior year comparable Projections with assumptions Inventory summary Fixed asset listing Schedule of company debt Ownership structure Company history, product brochures, other pertinent information Personal financial statements for active owners of more than 10%
FINDING THE RIGHT NON-BANK LENDER
Ask your bank Ask your CPA Ask your attorney Google asset based lending or commercial finance Check websites such as www.cfa.com Find a good advisor or intermediary and let them do
the search for you
CALL ME FOR ASSET BASED LOANSOR SOURCES FOR OTHER LENDING
Barry Yelton
North Mill Capital, LLC580 Beason Road
Mooresboro, NC 28114828-657-0030
Mobile [email protected]
Thank You!