Show Your Numbers
Tony Gray and Matthew Gillman go through the documents a lender asks for before funding a government contractor, what each one tells the lender, and what comes after the first round.
What goes on a business credit application?
Matthew Gillman: It is a commercial application, not a personal one. It covers company information: where you are incorporated, your business address, your industry and estimated annual revenue, a debt schedule listing outstanding debt, how much you are looking for and the use of proceeds. It also lists the owners and ownership, so the lender knows who owns the company, who manages it and who controls the decisions. If you have ever bought or leased a car, much of it will look familiar.
Questions about affiliated companies, joint ventures or past companies usually come later in underwriting.
Tony Gray: It gives the underwriting team a first narrative of the business and its leadership, and the management team is one of the risk factors a lender weighs.
Why do lenders ask for bank statements?
Matthew Gillman: Some lenders ask for three, six or twelve months, and some for none. Your accounting practices have nothing to do with your bank statements: they are true money in and money out. They show where deposits come from, whether by ACH, wire or check, how you pay your own bills, whether money goes to other accounts or third parties, and your true revenue.
Tony Gray: They also show whether the owners are living out of the business, using the company to buy things personally. Some would call that piercing the corporate veil, and it can become an issue later.
Matthew Gillman: Bank statements verify what you have told us. A contractor says it works for the VA, but no deposits come from the VA, and it turns out it is a subcontractor to a prime on a VA contract. That does not mean anything was withheld; the data just tells a fuller story. We also want to see payroll taxes being paid. With a full-service payroll company you can often see the tax withdrawal separately from payroll, and we ask for 941s at some point too.
What are AR and AP aging reports?
Matthew Gillman: This is where bookkeeping practice shows. If invoices are not entered when they are issued, or payables are paid by card or ACH without being recorded, cash and accrual get blended together. The accounts receivable aging shows who you work for, how much they owe you and how quickly they pay: current or past due. The accounts payable aging shows the same for what you owe.
What does a normal receivables aging look like?
Matthew Gillman: We benchmark against the industry and the customer. On a prime contract you will usually see net 30 terms, with invoices out for 15, 30, sometimes 35 days. On a subcontract, or where the sub is paid when the prime is paid, invoices may sit at net 45, net 50 or net 55.
Tony Gray: The aging tells a story about your operations, such as a problem with one customer or one subcontractor.
Why do lenders want detailed P&Ls and balance sheets?
Matthew Gillman: We want detailed reports, not summaries, to see how things are categorized, where expenses come from and what the margin looks like, so we can judge whether the business can service a loan or line of credit. The balance sheet shows receivables, payables, assets and liabilities.
If the bank statements show a commercial loan payment and the balance sheet does not show the loan, the bank statements are the accurate record, and it tells us whether the books are being kept the way they should be.
What is a borrowing base certificate?
Matthew Gillman: It applies if you have an existing asset-based loan. It shows invoice-level detail and potentially other collateral: inventory, equipment, plant and machinery, goods in transit, purchase orders. When a company with an asset-based line looks for a new lender, the last certificates show what collateral was reported to the current lender. With factoring, a factoring report can serve a similar purpose.
Tony Gray: It shows us the relationship you have with your existing lenders.
Why do lenders ask for business tax returns?
Matthew Gillman: Many companies file tax returns on a cash basis while keeping financials on an accrual basis. Lenders love accrual: it shows the true health and margin of the company, free of cash timing. But cash is what is actually coming in and going out. Two years of returns show whether what you tell the government matches what your financials say.
Tony Gray: Tax returns are official filings with the government, so they carry more reliability than some other documents.
Why do backlog and pipeline matter to a lender?
Matthew Gillman: Everything else tells the story of the past. Backlog and pipeline are about the future. In government contracting you can run flat for years and then win a 20, 40 or 100-person contract and go from a $1 million company to a $10 million company overnight. We look at what your future contracts look like to size a line of credit.
Later, as a customer, we compare your projections with what happened. If you projected a dollar of revenue, did you do 80 cents or $1.50? It tells us how good management is at projecting.
What happens after the first documents?
Matthew Gillman: In a second stage a lender wants information that verifies what you have provided: the contracts behind the backlog, 941s to confirm payroll taxes were filed and paid. Data always raises questions. Our approach is not to go piecemeal. We review everything, gather all our questions, and work through them in a few efficient calls, so we can get to approval and funding and you can get back to running your business.
Tony Gray: The initial documents give a quick snapshot of whether a deal is viable. If it is, we move to the next phase.
Read more on this
- Won a government contract? What you will be asked for
- The complete guide to government contract financing
- Start your application
This is an edited version of the conversation: spoken repetition is removed and each answer leads with its point. Every figure and example is as said in the episode. For financing specific to your business, talk to us.
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