Military Contracting Firms Branch Out with Accounts Receivable Lending
Posted on September 13, 2013 in Government Contracts
Military contracting is one of the most secure elements in the modern economy. However, minor shifts in U.S. policy or concerns about budget cuts can often cause serious credit issues for these relatively stable corporate entities. A recent article published in Bloomberg BusinessWeek discusses a wave of pessimism that occurred in late 2012 and caused stock prices and financials to plummet for a number of small defense contracting companies. Investors and economic experts were convinced that automatic budget cuts would create cash flow shortfalls for military contractors that would lead to widespread failures in this critical sector of the U.S. economy.
Predicting a Perfect Storm for Defense Contractors
According to experts, the military contracting industry was facing a perfect storm of related factors that could have caused devastation to many smaller companies in this sector. Budget cuts required by sequestration would have halted the availability of new contracts and would have eliminated numerous non-critical programs throughout the defense contracting community. These forced cuts, however, amount to only part of the story. The current tight credit conditions in the financial marketplace were also expected to make it difficult for contractors to acquire loans and lines of credit to weather this temporary loss of income. Although aerospace and manufacturing firms were expected to suffer most from the effects of sequestration, economic analysts were predicting a meltdown throughout the defense contracting industry of catastrophic proportions.
Investment Funding Not an Option for Many Firms
The dire warnings from respected investment firms and economic analysts prompted a major sell-off of stock in the defense contracting industry segment toward the end of 2012 and the first months of 2013. Although some contracting firms did close their doors during this period, most are still operational and some have even achieved higher profitability during the first half of this year. One key to their success may be the reduced impact of federal budget cuts under sequestration, which have turned out to be less draconian than first thought. Nonetheless, for publicly traded defense contracting firms, raising funds by selling stocks to investors remains an unlikely proposition.
Managing the Cash Flow Gap and Weathering the Storm
Diversifying into new marketplaces is one key to surviving the ongoing federal budget crisis and managing these challenging economic times. The BusinessWeek article highlighted the strategy of JWF Defense Systems, which opted to diversify into gas and oil supply to supplement its primary focus on weapons and armor for the modern military. Other companies are cutting back on staffing costs, engaging in reorganization and mustering a sizable cash reserve to manage the reduced revenues caused by federal budget cuts and payment delays.
Options for Smaller Military Contractors
Privately held firms may have fewer options in the financial marketplace. For these companies, accounts receivable loans can often be a viable alternative to the traditional lending marketplace and can offer exceptional flexibility in managing their cash flow difficulties. Asset-based lending programs use the value of purchase order agreements or outstanding invoices as collateral for loans and lines of credit. Contractors can monetize these financial instruments to acquire immediate cash on hand to manage diversification programs, reorganization costs and other ongoing operational needs.
Lending firms like 1st Commercial Credit specialize in creating workable solutions for business needs. Fast decisions, rapid disbursement of funds and an exceptional array of lending options ensure that defense contractors and other small businesses have the tools they need to manage their cash flow shortfalls in an effective and proactive way.