Government contractors’ performance and lending requirements can change with the slightest turn due to financial regulations, acts of nature and geopolitical occurrences. Knowing you are secure in lending to, or financing, government contractors starts here.

Government contractors’ stressors, including, among others, their financial performance, successful contract award, and building the infrastructure to complete the effort, combined with fulfillment of the contract, create pressures much like those when a diamond is created.

But even diamonds have flaws. Some flaws may be readily visible, while others need the aid of magnification to be brought to light. The lender must use its knowledge to identify those flaws that may impact its secured position vs. those that are not harmful to the lending relationship.

Relationships in lending include analysis of borrowers’ past and present business operations as well as understanding requirements linked to successfully perform on contracts. Contract awareness includes, though not limited to, the contract being:

• Fully executed by all parties
• Appropriated for the full contract amount (Base year plus
• Option years)
• Track appropriations-Purchase Orders (PO), Task Orders (TO), Work Orders (WO)
• Verify Periods of Performance
• Terms of Billing and Payment
• Billing vehicles (i.e., WAWF, IPP, Tungsten, etc.)

Familiarity with the contract terms, preparedness for the plethora of government acronyms, and lender vigilance in understanding the borrower’s obligations are all important before wading into the world of government contract finance.

Is Your Institution Properly Secured?

Whether a bank or a finance company in an ABL relationship or purchasing invoices in a factoring relationship, the collateral will be tied to services rendered and/or goods delivered and typically all business assets.

Perfecting the lender’s first lien position under the Uniform Commercial Code (“UCC”) and taking an assignment as allowed by the Federal Assignment of Claims Act (“FACA”) on prime government contracts where applicable, are two action items necessary to being secured.

Under the Uniform Commercial Code (UCC), a secured creditor perfects its security interest in accounts receivables (accounts) by obtaining a security agreement and filing a financing statement in the appropriate jurisdiction. Perfection in this manner works for both commercial accounts and accounts which are subject to the Federal Assignment of Claims Act (FACA). If this is the case, then why should a lender comply with the FACA?

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