Often, government contractors win large contracts that require rapid mobilization. This can create a classic “good news, bad news” situation where the contractor needs to pay their employees before an invoice can be billed and submitted for funding. Unfortunately, traditional commercial bank financing as well as factoring requires companies to borrow against invoices in order to fund payroll.
Consequently, with limited options in the commercial lending market, small business government contractors often resort to taking on high-cost, quick-turnaround FinTech debt from non-bank lenders. These debt facilities typically range in APR percentages from 20% to as high as 80% and can have a negative impact to the borrowers’ profitability. This can create a challenging cycle where small business federal contractors take expensive but fast debt which cuts into their margins and creates the need to take on additional debt, even as they are winning new contracts.
Live Oak Bank’s Mobilization Financing product breaks this cycle by providing small businesses with four times (4x) anticipated monthly invoice dollars in the first 120 days of a new government contract for an APR of 6 to 9%. Mobilization financing works alongside Live Oak’s line of credit product and provides financing for direct labor hours worked prior to invoicing the U.S. Government.
To demonstrate how this works, let’s use an existing Live Oak GovCon 8(a) minority-owned, economically disadvantaged, HUB zone small business borrower who recently won multiple Firm-Fixed-Price contract awards. The terms of each contract calls for Performance-based payments; that is, payment is made to the small business based on the estimated percentage completion of the total contract.
Since there are typically 45-90 days between the date of contract award until the vendor will begin invoicing, Live Oak Bank provides a 364-day term loan for each new contract award to bridge the 45-90-day payment conversion gap. The structure of each term loan consists of one required payment due at the maturity of the loan. Interest is assessed at the time of origination, and the amount of each loan contemplated is for a total of 4x the estimated monthly payment amount.
The following chart illustrates a hypothetical $350m contract mobilization facility originated on January 1, 2017:
The table shows how the payoff schedule would look without progress payments. However, the first invoice can occur as soon as 45-90 days after a contract is awarded, so any performance payments that are received before the maturity payment due date will be applied to interest first. Any remaining amount will be applied towards principal. Thus, it is likely that the loan will be paid off before the maturity payment is due in Month 12, since the loan amounts will be adequately covered by the obligated funds related to an underlying contract of approximately $1.1mm during the base period. Assuming a period of 30 days to ramp up performance of the work, we can anticipate the first invoice to be paid in approximately 60-90 days after contract award, with an average monthly invoice payment ranging anywhere from $90m to $110m, which would adequately pay down the facility within 4-6 months.
Here are the key terms of the contract mobilization product: