A ‘confession of judgment’ (also called a cognovit note but not to be confused with a consent judgment) is a document signed by a borrower that waives the right to due process if a debt is unpaid. The term “confession of judgment” means that the signer confesses and accepts the judgment (the decision of the court). This confession of judgment might also be a personal guarantee, in which the borrower pledges personal funds if the loan isn’t repaid.

Confessions of Judgment are Under State Law

‘Confession of judgment’ language is part of a loan agreement, specifically in a promissory note. This language is regulated by states. Not many states (including Florida) allow confession of judgment language, but New York, where the Tampa couple’s loan company had its main office, does.

This concept isn’t difficult but it’s strange, so let’s look at how this all happens.

What Does a Confession of Judgment Language Look Like?

How Can the Business Get Its Money Back?

What Can Be Done Before Signing

“Interest rates are rising and cutting into the margins of small businesses.” This is a common gripe amongst business owners.

The WSJ Prime Rate is 5.00% – a historically low number notwithstanding several Fed interest rate hikes. For historical perspective, in 2001 the Prime Rate was 9.00%¹ .

So, are interest rates cutting into margins?

The verdict: Slightly; but not enough to matter.

The impact that interest expense has on margins is often overestimated. Let’s look at an example of a business billing $100 per month; with a revolving line of credit of $100; paying 6% annual interest on the line; and generating a 6% margin.

After interest expense, the business makes $5.50/month – $6 of margin less $0.50 in interest expense.

Over the course of the year, the company will pay $6 of interest ($0.50 per month for 12 months) but will make $72 of margin ($6 per month for 12 months), thus the company will pocket $66. Regrettably, some business owners figure that if they have 6% margins, and pay 6% interest, the interest eats up their entire margin. Clearly not the case.

Even if the company had a non-bank expensive FinTech lender (Guido the loan shark) at 18% annual interest rate their margin would be the same $72 annually with Guido’s cut being $18, thereby pocketing $54.

So what is squeezing the business? Other factors, like fringe rate increases, have a much larger impact

In the above scenario, interest rates are only .50% of each invoice. If fringe is 10% of each invoice, the impact of a 10% increase in fringe costs would have 200 times the impact of a 10% increase in the WSJ Prime rate to 5.50%.

Margins are getting squeezed but the culprit is not rising interest rates but rising fringe costs driven mainly by health care costs. While interest does matter – it is not hurting the bottom line as much as other factors.

Springing up like daffodils in April is a glut of finance companies purporting to be “best-in-class” at financing government contractors.  Most often these companies provide working capital financing to help execute on contracts.  Service providers rarely need term loans unless they are making an acquisition.

Here are five “must haves” for any finance company that stakes claim to “best-in-class.”

1. All-in cost less than standard credit card rate. Some lenders charge well over 20% effective annual interest rate.  Many go even higher – up to 40% in some cases.  Often these companies obscure the true cost.  Take some time to analyze the fees and have your accountant or financial advisor help if necessary.

2. No personal guarantee or validity guarantee. Your customer – the US Government – has perfect credit.  There is simply no reason for you to tie up your personal assets, liquidity, home, etc.

3. No termination fee. As your business grows, you may get offers from other financing sources including commercial banks.  You need to be able to move.  Sadly, many financial companies require hefty termination fees to let you out of a bad deal and into a better one.  Such handcuffs – really just a shakedown – are unfortunate.

4. Specialists in GovCon. You know how unique and specialized government contracting is.  Make sure your financial partner is equally well-versed and experienced in the industry.  As a rule of thumb, make sure that at least 75% of your financing source’s customers are GovCons; that they have provided commitment letters for bid submissions; and that they can increase your facility, without requiring additional underwriting, as you win new contracts.

5. Profitable. Nothing is worse than having your source of working capital struggle financially. In the extreme, they may not be able to fund when you need it. Making sure non-bank lenders are profitable is a challenge as most are private.  Ask them to verify that they make a profit.  They can fib but if something goes wrong you have their misrepresentation on record.  Some companies, especially the internet lenders, are public and you can see their filings.  And some are scary.

To paraphrase Charles Dickens “It is the best of times, it is the worst of times.”  There have never been so many non-bank financing options.  There also have never been so many whose claim, if honest, would be “worst-in-class.”  Be careful.  Be very, very careful.

For more information on Republic Capital Access and what they can do for your business, you can visit them on their website HERE.  In addition more information about Govmates, a teaming partner platform for government contractors, can be found HERE.

Author:  Katie Bilek, Sr. VP Republic Capital Access

Originally Posted on LinkedIn:  https://jamis.com/five-must-haves-when-seeking-us-government-contract-financing/https://www.linkedin.com/feed/update/urn:li:activity:6387772567704334337