May 2018 – In the world of Asset Based Lending, Field Examiners and secured lenders often work in conjunction and with a mindset of excluding federal government accounts receivable (A/R) when calculating a borrower’s eligible collateral. Examiners often times are instructed by the secured lender to exclude these accounts on the basis that underwriting is complete and Uniform Commercial Code (UCC) filings have been perfected and the federal government simply does not recognize the UCC. The Examiner will take those marching orders, perform the examination, and consult to the Bank without further assessing these unique accounts.
>> As a result, Federal government contract revenue and associated A/R has essentially and too often been viewed as ineligible collateral. However, that may not be the case.
Dopkins & Company (DAC) experienced Field Examiners understand that many Banks and specialized lenders embrace financing government contractors and have taken their underwriting and credit analysis one step further. Their particular borrowers are in the business of servicing the federal government under stringently administered contracts. In lieu of or in addition to, a one-page UCC filing, additional documentation will be filed directly with the federal government to perfect a security interest in the borrowers A/R. Dopkins Field Examiners are familiar with the Federal Assignment of Claims Act (FACA) of 1937 which established that lenders may arrange for payments under federal contracts to be irrevocably paid to them in support of loans made to the contractor. In Examiner language, if the borrower’s primary collateral is A/R under a federal contract, this is the only way under the law for the lender to control the collateral. The Federal Acquisitions Regulation (FAR) governs the acquisition process by which executive agencies acquire goods and services by contract with appropriated funds. Field Examiners familiar with the multitude of contract-based service A/R can recognize exposure and opine as to the extent a lender may properly perfect their security interest and finance government contract revenue.
The General Services Administration (GSA) simplifies federal procurement by negotiating large multi-user contracts and by leveraging the volume of the federal market to drive down prices and contract costs. Without getting into too much detail, there are generally four types of government contracts with multiple executive agencies that provide a borrower with contract revenue.
- Fixed price contracts require the contractor to devote a specified level of effort over a stated period of time for a fixed dollar amount.
- Cost-reimbursement based contracts provide for payment of allowable incurred costs to the extent prescribed in the contract and the contracts specify an estimate of the total cost for the project for the purpose of obligating funds and establishing a ceiling that the contractor cannot exceed.
- Incentive Contracts are designed to obtain specific acquisition objectives and emphasize improved delivery and better technological performance by relating the amount of profit or fee payable to the contractors’ performance.
- There are also Indefinite-Delivery contracts and Time-And-Materials contracts but the point is that all contract revenue billed can be properly assigned to the Bank with proper compliance with FACA within the context of FAR.
Borrowing base eligibility of federal government contract revenue can be properly assigned to a secured lender once properly identified and understood. The Examiner and Bank should ensure proper compliance with the Federal Assignment of Claims Act as specified in the Federal Acquisitions Regulation or (FAR) of the US Code. FAR outlines the specific method and process to assign government contract collateral in addition to or in lieu of UCC filings. DAC experienced Examiners have touched, assessed, and opined on many private and commercial service, software as a service (SaaS), and construction contracts as well as federal government contract awards.
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Dopkins ABL Consulting Services is in the business of helping our clients improve the profitability of their loan portfolio. For more information related to Federal Contract financing, please contact Marc Scanio at firstname.lastname@example.org.
About the Author
Marcus J. Scanio
Marcus organizes and manages client assignments and ensures the overall success of each project. In addition, he is responsible for providing feedback regarding the performance in the field and report writing for the Firm’s team of ABL professionals.