An Insider's Guide to Banking for Government Contractors
History may well characterize the 1990s as the "Decade of Consolidation" in American commerce. In general, government contracting companies have been as impacted both directly and indirectly, as any other industry.
First, there has been much merger and acquisition activity among government contractors, primarily in the larger corporate arena. Second, they have been subjected to the challenge of government agencies consolidating, or "bundling," contracts which limited the number of firms capable of competing for the work. Third, they have faced the pressure of consolidations within the banking industry, which forced many smaller and mid-sized companies to seek alternative financing sources because the resulting larger banks focused their attention on larger firms.
Many of the surviving independent banks had neither the interest in nor the expertise for providing working capital financing for those companies.
Lack of lenders and support personnel with adequate skills
In fact, even those independent banks that developed interest in financing government contractors have, for the most part, had great difficulty locating lenders and support personnel who could provide adequate skills and experience to enable the banks to enter the market with safety and comfort.
This has been true even in the Washington, DC area, where there is a heavy concentration of government contracting activity. Consequently, many of those government contractors most needing bank financing are either still hanging on—however tenuously—to their existing relationship with the big bank and hoping they do not receive their "walking papers" any time soon. Or they have had to resort to financing sources that are very expensive—the choice between the "devil and the deep blue sea."
Even if the company is not "on the bubble" with its current bank, the contractor frequently experiences a revolving door of loan officers. Often the loan officer assigned to the company is young and very inexperienced. The young officer has had no opportunity to become familiar with the company's business. He or she has no knowledge of the nuances involved with contracting with agencies of the federal government, much less an appreciation for its challenges and vicissitudes. That lack of knowledge and experience is time consuming and expensive for the contractor.
Company officers must explain situations fundamental to their business, engage in a continual loan officer education process, and repeat the process with each change in loan officer. That takes time and costs money and may result in needed credit being denied because the company does not have an experienced advocate within the bank.
Credit decisions often made by people unknown to the contractor
In many big banks, the credit approval decisions are made by people unknown to the contractor and who do not know the company or understand its business. Frequently, the presentation of the company's loan request to the bank loan committee is not even made by the company's loan officer, but by another banker who knows even less about the company and its business. It is tantamount to lack of representation with little, if any, chance for appeal.
What, when finding alternatives limited as described above, can the government contractor do? What actions can be taken? Where does one look? What should be looked for?
Find a bank capable of meeting your company's needs but not so large that your company will be unimportant and lost in the crowd.
- Ask about the bank's legal and in-house lending limits. The limits should meet three criteria: 1) not so high that your requirements will never be comparatively significant; 2) approximately match your projected requirements for two to three years in the future; or 3) are less than your current or projected requirements, but are complemented by reliable participating banks.
- Learn about the bank's loan approval process, procedures, response timeliness, and flexibility to meet short-notice requirements.
- If the bank uses loan committees to approve credits, find out the names of the members and ask to meet with the key decision-makers.
- Learn the meeting schedules and if the committees meet on-call. Bankers should ask a lot of questions. Don't just answer the questions; analyze them to deduce the level of the banker's level of understanding of the business your company is in. If the questions do not indicate a depth of knowledge of the business of government contracting, beware! You may not get the support you need to prosper.
Ask the banker your own probing questions that will tell you even more about the depth of his/her knowledge of the government contracting business, how government procurement works, the FAR and its agency Supplements, costing, bidding and competitive issues, his/her contacts within the government, the government payment processes, and whether or not the banker will be a potential value-added resource for your company.
Ask questions about the bank:
- how many government contractor customers does it serve;
- what is its experience in serving the industry;
- what is its commitment to the industry as reflected by its policies, procedures, and the amount of its loans committed to government contracting companies.
Also, ask for a few government contractor references you can query about the support the bank provides. And finally, ask the banker for the bank's latest annual report and obtain its rating summary from an investment house.
With this kind of information available, a company will be much better prepared to evaluate a bank to support its funding requirements and determine whether a new banker is needed.
For more information on this topic, contact McRae at 703-506-8116, fax 703-506-8160 or e-mail: cmcrae@afsb.com.
About the author: Cameron McRae, vice president of commercial lending, at Acacia Federal Savings Bank (VA), has been in banking for 38 years. For 25 years of those years, he specialized in financing government contractors and technology firms. He is in demand as a speaker on financing and cash flow management issues at numerous seminars for government contractors. He also is the author of two articles on financing government contractors that were published nationwide in banking publications. He has been instrumental in training banks in government contractor financing and was employed for more than three years as vice president, administration and finance, of a government contracting firm, where he helped the company achieve its highest level of profitability in recent history. McRae is a graduate of Duke University and a member of the National Contract Management Association and the Northern Virginia Technology Council.
Edited by Joyce Jungclaus, Editor, GovCon.com