1 Financing Alternatives For Government Contractors Richard Lewis Financial Engineering Counselors, Ltd. (A Veteran Owned Small Business) Falls Church, Virginia 1

2 “While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second ….” 2

3 Your company has landed a new Government contract, one that will result in a significant increase in revenues. However, In order to fulfill the contract you must commit to additional: People (payroll) Training Materials Related Costs 3

4 Timing: Before payment is received from the government you will want WORKING CAPITAL to cover commitments. How can you gain/obtain the cash you need beyond utilizing: 4

5 The Challenge: Loans from family and/or friends Equity Injection: But raising capital generally is Expensive Takes too long to meet short-term contract requirements Requires an ownership participation Credit cards Delayed payment to vendors 5

6 Solution:Planning! 6

7 Planning: Minimize risk of having to scramble to raise enough capital to ramp up for future major contracts: Internal business development forecasting s hould identify and signal situations to senior management allow for proactive review of significant operational, personnel and financial impacts 7

8 Planning - Things Often Overlooked Allow for contract negotiations: Invoice payment terms Extended delivery dates Partial payment upon order placement Progress payments based on specific performance criteria* 8

9 Planning: Prepare business summary (financing request - loan application) Nature of business/company profile Market niche and reason Management brief summary Income Projections Financing request ($ and terms) Use of proceeds 9

10 Existing Bank or Lender - If your company has an arrangement with a bank or lender, approach bank or lender as far in advance as possible and try to negotiate an increase. Remember, financiers HATE SURPRISES! If you are in good standing, a responsive lender may provide short term capital until the government pays 10

11 Trade-offs for an increased facility may include: Your commitment to a longer term deal More restrictive loan covenants Higher interest rate Constraint as to other debt or leasing arrangements Additional collateral require Personal guaranty or co-signor 11

12 Payroll Finance (with Sterling National Bank) :  Combines funding with back office support  Scalable – as your receivables grow, so does your funding  Provide financing to start-ups to established businesses with over $100 Million in annual sales  Three Step Process  Payroll Processing  Financing  Invoicing 12

13 Payroll Finance (with Sterling National Bank): Processing  Web time entry through our proprietary “Web Oasis” system  Weekly payroll checks in your firm’s name or via direct deposit or pay card  Withhold, remit and file all payroll taxes and reports  W-2’s & 1099 processing  Preparation & e-filing of quarterly tax returns  Employee “self-service portal” 13

14 Payroll Finance (with Sterling National Bank) : Financing ◦ Funding up to 100% of payroll each week ◦ High advance rates ◦ Profits paid weekly ◦ Start-ups to established businesses with over $100 Million in annual sales 14

15 Payroll Finance (with Sterling National Bank) : Invoicing ◦ Customizable invoicing and delivery via US mail, , electronically via Government portals (WAWF, GSA) ◦ Electronic payment and level 3 credit card processing ◦ Accounts receivable management, real time reports & cash applications 15

16 Factoring: The sale of your invoices, accounts receivable, to a bank or finance company (the “Factor”). Factors will: Advance up to 90% of invoice amount The balance is refundable upon receipt of payment, less interest and transaction costs Provide weekly or mid-month funding of unbilled accounts receivable Notify the Federal Government through the Federal Assignment of Claims provisions 16

17 Factoring – con’t Advantages: Grow with you Provide most A/R bookkeeping services Customer credit worthiness, collections, and credit risk become a shared responsibility Initial approval process can usually be a matter of days Credit criteria is based on your customer Provide financing for start-ups, 8a, minority, Native American, service disabled veteran, woman-owned contractors, or companies that may have a short term credit history. 17

18 Contract Financing - PO Financing Negotiate financing based upon your Federal Government contract purchase/work order(s) Based upon the credit worthiness of your customer Easiest when your products or services are well established Products or services are new, non-standard, and/or unproven, PO more difficult to obtain Effectiveness of Contract/PO financing in a pre-revenue ramp up situation will be determined by how soon you can invoice 18

19 Commercial Financing – Asset Based Lending 19 Provided by most banks and commercial financial companies Alternatively called Revolving Credit or Borrowing Based Lending Primary asset is company’s accounts receivable 75% - 90% advance rate Secondary asset may be inventory, fixed assets and in some instances intellectual property and may be used longer or term debt Advance rate less and usually based on liquidation value of asset Company’s credit worthiness, as well a s customers’ determine advance rates and pricing

20 Used to generate capital from fixed assets that are to be obtained or currently owned by company, such as computers, equipment, furniture and fixtures, vehicles, and real estate. Banks, financing companies, dealers, and manufacturers provide these more specialized services. Company’s credit standing and the quality of the assets involved will determine the amount of cash that can be raised and the terms under which it is provided. Specifics of the agreement will determine if these leases have to be reported on your company’s balance sheet or if they can be treated as “off balance sheet” items. 20 Leasing and/or Sale and Leaseback

21 Numerous loan programs for small businesses. The SBA is primarily a guarantor of loans made by private and other institutions. The Basic 7(a) Loan Guaranty serves as the SBA’s primary business loan program to: Help qualified small businesses obtain financing when not be eligible for business loans through normal lending channels. The agency’s most flexible business loan program financing under this program can be guaranteed for a variety of general business purposes. 21 SBA Small Business Loan

22 SBA Small Business Loan Loan proceeds can be used for most sound business purpose working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. 22

23 SBIR (Small Business Innovation Research) A Federal Government program Administered by 10 federal agencies Provide early-stage Research and Development funding Solicitations are released periodically from each of the agencies Competition for funding is by submitting proposals to agency's solicitation Each agency has various needs Learn more about them by visiting their sites. Here are the addresses for the SBA, DOD, and NIH: – 1,000 grant programs, > $400 billion 23 SBIR and Grants

24 None of the alternatives mutually exclusive Be Aware: significant legal and operational differences Combinations can be very effective The terms of some borrowing agreements may limit your ability to take on additional debt and they should be entered into only as part of a coherent financing strategy Do not be alarmed when the lender asks for your personal guaranty. 24 Conclusion

25 THANK YOU! Richard Lewis Financial Engineering Counselors, Ltd. A Veteran Owned Small Business