Give Me 5 313: Contract Financing for Federal Procurement A Panel Discussion

Women Impacting Public Policy (WIPP) The Voice for Women in Business in our Nation s Capital. National bipartisan public policy organization that advocates for and on behalf of women and minorities in business, strengthening their voice in the legislative process, creating economic opportunities and building bridges and alliances to other small business organizations. Representing over half a million Women Business Owners including over forty-eight business organizations. Thirty local Instant Impact teams across the country engaging with legislative officials and the business community to advocate for Women Business Owners.

Give Me 5 National program from WIPP & American Express OPEN designed to educate women business owners on how to apply for and secure federal procurement opportunities. Give Me 5 works to increase the representation of Women Business Owners that win government contracts by providing resources and information to make it easier for them to register their businesses with the Central Contractor Registry (CCR). This is a requirement to gain eligibility to apply for federal contracts. Women Business Owners could gain more than $5 billion in annual revenues if the 5% contracting goal set by Congress was reached. www.giveme5.com

Panelists Frank Merendino, Senior Vice President & Team Leader, Sandy Spring Bank Government Contracting Lending Group Amy Horn, EVP, Federal National Payables, Inc. Hank Wilfong Jr., CPA, President of NASDB and WIPP National Partner 5

Introduction to Financing Frank Merendino, Senior Vice President & Team Leader, Sandy Spring Bank Government Contracting Lending Group 2010 WIPP All Rights Reserved www.wipp.org www.giveme5.com 1-888-488-WIPP

8 Section I: Introduction to Bank Financing

Financing your business For a relatively new business your business plan should address how the business is going to be financed do you need a loan? How much do you need? Can you justify the same? Generally you have the following sources of financing: Equity - such as owners capital, venture capital and money from friends and family. This is money that has actually been put in the business. Debt - which includes all types of loans, credit card balances, leases etc. 9

How much do you need The amount you need depends upon what you need for operational, expansion, equipment purchase or even to start a business. This should be addressed in detail and be apparent to the lender. A 12 month Cash Flow statement is a good starting point! 10

Types of Debt Bank Loans and lines of credit Typically a term loan is for a capital purchase, long term working capital and is given for a specific period of time. Payments are made monthly and are for both principal and interest. A line of credit is for short term working capital needs. It is for a shorter period of time. Payments are made monthly but are interest only. Bank loans can also be SBA guaranteed. 11

Types of Debt (contd.) Business Credit Cards Are used by many start up companies as a means of financing. Keep in mind that these are unsecured debt and are personally guaranteed. These credit cards are also reflected in your personal credit report and affect your FICO score especially when you apply for a business loan. Leasing Leasing is a method of renting the equipment for a period of time with the option to purchase at the end. Generally you can finance up to 100% of the purchase price. 12

Lenders are guided by the 8C s of financing Character Credit Cash Flow Capacity Capital Collateral Conditions Commitment 13

14 What do lending institutions look at? Business history, plan, management team Ability of the business to pay the debt What is the collateral? Business assets, home equity? Capital invested by owners Personal Credit of majority owner How is the owner going to pay personal expenses If the business fails can the guarantors pay the loan? Is the loan amount appropriate is it enough or too much

For relatively new businesses Lenders look at: The business plan simple, clear and concise The financial projections realistic or not The Debt Service Coverage ratio for the business as well as personally for the guarantors/owners Collateral Capital invested The personal credit and financial statement of majority owners And a SBA guarantee! 15

Financial Terms to know Debt Service Coverage Measures the business cash flow and the debt payment the higher the better Calculated as Net income+ depreciation+non cash expenses+interest/loan payments Banks look at the business coverage and global coverage, which includes personal expenses Collateral Coverage What assets cover the loan may include business and personal assets 16

Loan Package Should include: The business plan with financials Management resumes 3 years tax returns/cpa prepared financials-business YTD financials if application is made mid year Up to 3 years tax returns for all guarantors Personal financial statement for all owners with more then 20% holding in the business Detail accounts receivable statement (if applicable) If government contractor then copy of contracts on hand and a contract backlog statement 17

SBA Loans The Small Business Administration has loan programs to help small businesses to obtain financing, however keep in mind that the loan is made by the bank/financial institution and only guaranteed by the SBA to a certain percentage. The borrower has to pay a guarantee fee to the SBA depending on the loan amount. Additionally the bank pays an ongoing annual guarantee fee to the SBA based on the principal loan balance. Under the American Recovery & Reinvestment Act the SBA has temporarily increased the %age that is guaranteed as also temporarily waived the guarantee fee at the time of obtaining the loan. 18

Types of SBA loans 7(a) Term loans: loans of $150,000 or less 85% guarantee loans up to $2 million 75% guarantee Under ARRA these loans are guaranteed up to 90% SBA Express generally used for lines of credit, 50% guarantee and for a maximum of $350,000 Patriot Express Pilot program introduced by the SBA in 2006 specifically for businesses owned by veterans, active duty military, National Guard member or a spouse or widowed spouse. Maximum loan amount of $500,000 with a 75% to 85% guarantee based on loan amount. Under ARRA the guarantee % is temporarily increased to 90% 19

20 Section II Lending to Seasoned Government Contractors

What is Asset Based Lending Established Government Contractors have an ABL or Asset Based Lines of Credit to finance working capital. The Lender allows the borrower to borrow up to a certain % of the billed eligible receivables which varies from 75-90% of the receivables. The amount you can borrow or the availability is governed by a borrowing base formula and you generally have to submit a borrowing base monthly. Generally there is an assignment of prime contracts. The lines generally have maturity of one year. Scheduled financial reporting is required and includes the following - monthly A/R and A/P aging, quarterly financials, annual compiled/reviewed or audited statements, tax returns etc. 21

What do Lenders look for while doing an ABL line of credit Quality of management team who are the founders, their experiences, technical expertise and backgrounds Quality of Financial Statements GAAP prepared? Financial System /accounting personnel is it DCAA compliant, do you outsource your accounting function who? Relation Partners Accountants/CPAs/Attorney/Bankers are they well versed in the Government Contracting area Client base diversity Business cash flow Quality/quantity of A/R (collateral) Contract backlog Relationship bank debt to capital base 22

What to look for in a bank Local decision making ability Knowledge in the Government Contractor lending area A bank that can grow with you Is a preferred SBA lender You know your Relationship Manager and consider him/her as a trusted advisor Has the technological capabilities you are looking for online banking, remote deposit etc. 23

Our Government Contractor Program Sandy Spring Bank s Government Contractor Lending Team has over 100 years of combined experience Clear understanding of the industry Provide creative, competitive, and flexible solutions which include: Working Capital Lines of Credit Treasury Management Services Standby Letters of Credit Term Loan Equipment Financing Business Insurance Corporate Credit Cards and Merchant Bankcard Services 24

Frank Merendino Senior Vice President & Team Leader Government Contracting Lending Group Sandy Spring Bank 9910 Main Street, Fairfax, Va. 22031 Office: 703-255-4632 Mobile: 703-795-7338 Email: fmerendino@sandyspringbank.com 2010 WIPP All Rights Reserved www.wipp.org www.giveme5.com 1-888-488-WIPP 25

A/R Lines of Credit Fast, Flexible Funding Nationally Since 1992 Lines of Credit from $50,000 to $5,000,000+ When You Can t Get Bank Financing, Borrow Against Invoices Advance Rates Up to 90% Escrow Agreements to Pay Vendors/Subcontractors Demonstrate to prospects you have funding lined up Accrued Revenue Advances Before You Bill 28

Our Customers are Small Business Start-ups High Growth Not yet Profitable IRS Issues Need Larger Line than Bank can Offer No Construction or % of Completion Funding We Fund Government and Commercial Contractors 29

How Does it Work? You Invoice your Government or Commercial Customer You send FNP a Copy of the Invoice FNP Wires Up to 90% of Your Invoice Your Customers Pay to FNP s Lockbox FNP Takes Out the 90% & Interest FNP Sends You the Balance 30

Amy Horn Executive Vice President Federal National Payables 7315 Wisconsin Ave., Ste 820W Bethesda MD 20814 Email: ahorn@federalnational.com Cell: 240.601.8334 www.federalnational.com 2010 WIPP All Rights Reserved www.wipp.org www.giveme5.com 1-888-488-WIPP 31

How to Insure Accuracy in Accounting 1.) Hire a good accountant. 2.) Hire a good accountant. 3.) Hire a good accountant. 34

35 What IS a "good" accountant?

What are "good" accounting records? 36

Alternative Financing and Cash Flow Considerations Bill as often as you can Use of credit cards Make sure you know what s required Accurate invoices in acceptable format

Alternative Financing and Cash Flow Considerations Small Business Prime Contractors Don t pay your subcontractors until you are paid by the government Small Business Subcontractors Negotiate favorable payment terms ie: five days from receipt of invoice

Alternative Financing and Cash Flow Considerations Consider an escrow account Assignment of Claims Act Prompt Payment Act Advanced Payments, Progress Payments

Procurement, Energy & Healthcare Committees Local Instant Impact Teams Weekly Policy Updates Relating to Your Business Questions? Contact WIPP Staff Program Coordinator: Michael Fravel mfravel@wipp.org (415) 434-4314 Visit American Express OPEN s Government Procurement Website: http://govtcontracts.open.com/ 2010 WIPP All Rights Reserved www.wipp.org www.giveme5.com 1-888-488-WIPP 44