Financing Your Government Contract: Interview W/ Matt Stavish (Podcast Transcript)

[00:26] Richard C. Howard: Hey, guys, Ricky here with DOD Contracts Academy, and today we have an awesome conversation with Matt Stavish. Matt specializes in the financial component to helping businesses that are selling to the federal government. Now, this is important. It's something that a lot of businesses don't think about until they either get close to being on contract with the government or are on contract with the government. In fact, this is one of our top ten questions that we get, because when you're on contract, often if you're invoicing the government over a period of time, there's going to be a delay for when they pay you. So if you're paying people to do services, if you're developing a technology, you're going to have to foot the bill for that until you get reimbursed. So Republic Capital Access is the company he's from, but whether you use them or another bank, this is a great topic to listen to because what you're going to hear is things like, hey, when you're putting a proposal in, what do you do if you need a letter of financial capability? Well, that's something that a company like a Public Capital Access could provide to you or a bank that specializes in this. And it's very important when you're getting whether it's financial advice or you're engaging with someone legally, you want somebody that actually understands government contracting that specializes in that they're not just doing it as a side project. Public Capital Access and Matt have been doing this for a long time, so they have some great notes. Everything from, hey, when you're putting a proposal in, do you include a letter of financial capability? And what is that? All the way to hey, what are some good tips for companies going after Silver contracts like SBIRS? So there are ways. And he has some great advice for how you can set up your milestones and how you can set up monthly payments with the government. You really want to listen to this. Don't miss it. And that episode is coming up right now. If you have any questions, head over to Dodcontract.com. You can check out our academy. We take everything from just registering to sell to the government and the Department of Defense, all the way to influencing contracts and your advanced strategies, like some of the stuff you're going to hear in the podcast today. We'd love to see you there and check out this episode. How's it going today?

[02:27] Matt Stavish: It's good. It's a busy time of year, the school year end, so we're seeing a lot of different opportunities. A lot of contractors seeing a lot of either exceptional growth or just winning some of the first few contracts so it's exciting time and a lot of companies we're speaking to are trying to figure out the capital puzzle.

[02:46] Richard C. Howard: Yeah, I'm glad that you're on because you're probably the first guest we've had on that specializes in this and most of our episodes are probably geared more towards selling to the government. Like hey, how do you win that contract? How do you consistently win those contracts? But we have a few clients that we've developed over the years where they realize once they're on contract they may have a new challenge. Right. Because there's a whole host of things that start popping up once you're on contract with the government. One of those is funding. Right. So depending on when the government's going to reimburse you for the contract, depending on how big that contract is, small business may need to go out and find funding. So I thought that maybe we could start with a little bit about you. I know we kind of went back and forth at the beginning, talk about our backgrounds but tell us a little bit about yourself and where you're from and then let's jump into Republic and what you guys specialize in.

[03:45] Matt Stavish: Sure. So I've been with the public for almost eight years so I've been in the specialty financing space for a majority of my professional careers located in Northern Virginia so kind of at the hub of GovCon. We make our way out to all the big conferences but based in the Northern Virginia area, the firm itself we've been around since 2009. We financed over 1200 contractors and 4000 unique contracts. Member of the DOD Trusted Capital Marketplace and all of our clients have a federal presence either as a prime contractor or subcontractor. A lot of folks get started as a sub, especially in the services space from what we see. But they're all the presence in the federal market. Our staff speaks in borrow language and we understand the long acronym based sentences that government contractors are used to talking about their business.

[04:43] Richard C. Howard: Oh yeah, no that is a challenge. Whenever I'm around my wife and I have someone from work on the phone or in the room, she doesn't want to be near us because she can only understand about 10% of what's going on so specifically to federal contracting. So we focus mainly on the defense sector but we have clients that are selling to all the agencies. Maybe you could walk us through what a typical small business would encounter when they would need your services.

[05:12] Matt Stavish: So first and foremost we get brought in a lot is providing letters of financial capability. Sometimes access to capital and financing can be a discriminating factor in the RFP process. So we're brought in a lot of times to provide and sometimes in the RFP itself will state that the contractor needs to have financial capability of a certain number. We do a lot of those letters. There's no obligation or cost for it. In the fourth calendar quarter of last year, our letters won a little over $900 million of contracts for three different contractors.

[05:47] Richard C. Howard: That's great.

[05:48] Matt Stavish: We had a company a couple of weeks ago, they found out they're a successful bidder on a services contract via my letter for $6 million in January, and they want a little shy of a quarter billion dollars contract over five years. So up front. You know. We like to talk to folks when you're on that front end and you're really in the RFI RFP phase. And you may think that putting in a letter of financial capability would be a positive thing for the outcome. Or it may be a mandate in the RFP and we sent the bar clauses that would show that it should be an acceptable format. So I think kind of at the front end, it's just something for everyone to keep in the back of your mind, especially services, because the government is really concerned about payroll. Sure, but do I need to have access to capital and what would that look like? Even free award.

[06:45] Richard C. Howard: Yeah, it's funny, I kind of look at that as just drawing an analogy to real estate, right? And that's where my wife is operating. But when you put an offer in on a house, typically you're going to have to have if you get a mortgage associated with that, someone's going to have to provide you a letter. A mortgage lender, usually your bank saying, hey, they're approved for X number of dollars. Right. And often that could be the difference between winning and not winning when you're putting a bid in on the house, because sometimes that mortgage lender isn't answering questions or they haven't done their proper work on the backside. So there are a lot of details there that can make a difference. And it's the same thing with you're putting a proposal in on a contract with the government, looking at if it's required, especially that they have that type of letter there and who's providing that letter. Is it a facility that typically doesn't do that? Are they familiar with the language? Have they done this for you guys? Have been doing this for a long time and have been very successful so, yeah, absolutely, an important part there. Maybe we could talk a little bit beyond the letter of financial capability. Right. So small business has gone in and we've heard this from clients, and I've seen this on the acquisition side when I was a acquisition officer. Sometimes a business is surprised to find out that they don't get paid immediately from the government.

[08:08] Matt Stavish: Right.

[08:08] Richard C. Howard: So just like it takes a long time typically to put a company on contract for just about every government agency, there's a cycle as far as reimbursing a company for the work that they're doing. And there's a process for that. If you could tell me a little bit about how the funding comes to play for a business that is on contract with the government?

[08:29] Matt Stavish: Certainly. So at the baseline, we think that all contractors should have some arbased financing capability. So can you turn outstanding receivables into cash to accelerate that cash flow, to make a payroll pay, a lease or whatever it may be? And that's typically provided through the banks. And there's a lot of banks who really understand govcon, especially in this market. And nationally, there's some very strong ones too. But you need a baseline of an AR financing facility. So we like to talk to folks in timelines. It's very simple. Contract starts on October 1 and you're going to bill on November 1, and then you're going to get paid on December 1. So that's 60 days from start to payment and let's say 30 days. And then where are the payoffs that you need to come up with to get to initially invoice generation? Right. So, pre-receivable and how does that look? Is it payroll? Do you have the money to make the payroll without borrowing money from, like us or a bank? Will your bank allow you to borrow pre-receivable? Those are good questions to ask because that's typically a harder product to obtain in a bank. Once you get to a build receivable, that's where you get build receivables financing for the product. Folks, pre-receivable financing looks like purchase order finance. You may need a letter of credit to get a vendor to ship a product. So how do we get to a receivable that's being accepted by the government? What's that type of capital look like really depends on the product or service that you offer to the government. The most basic thing though is can you finance the receivable? And so everyone needs that just in case. Even if working capital is in a good state, a lot of the folks who work with are in the banking industry and a lot of government contractors have lines of credit. They're not utilized. But is there just a case? So we always look at that step one. And then step two is on this new contract, what do you need from a capital perspective to create an acceptable product or service that the government sign off under?

[10:41] Richard C. Howard: Raj yeah. Crucially, important, critically important and often overlooked by especially new businesses that are looking to sell to the DOD or other agencies. I know you said you're agency agnostic and I don't know, I'm assuming you're also kind of industry agnostic, but do you tend to work with certain types of businesses? You mentioned services. Are there any other type of businesses that you guys tend to work with?

[11:09] Matt Stavish: So very broadly, people sell government price product and services and then you can break that down into a bunch of different industry types. And then we have funded all sorts. Like on the services space, it's been high end, it agile software development personnel down to janitorial sources or Sea contract on the product side, everything from reselling or an allterrain vehicle to a nonstandard munition sure to electronic software, to technology equipment. But it kind of all comes down to the same basic questions of what do you need to create a receivable? And then what is that? And then the only thing that gets really tougher is if you're going to sell something that blows up, there are some folks that don't like to finance that. We don't have an issue with that, but that's only where we typically get a hiccup from putting together a solution, folks.

[12:16] Richard C. Howard: Okay, interesting. Do you guys ever work with companies involved with foreign military sales?

[12:23] Matt Stavish: Yeah, you're selling to the State Department, right. Work as challenging as we people are selling direct foreign governments, and then we always say we don't want to probably finance that. And you should really make sure that your counsel on the legal side has experience. Litigating in that land is a good place to start.

[12:43] Richard C. Howard: Yeah, it's an interesting place for companies to operate. And we often see too, that businesses will start maybe with foreign military sales and then whoever they are inevitably selling to, even though technically it's a contract between them and the US. Government. A lot of times our foreign partner will want a direct commercial sale after that or in line with that, just usually they're cheaper and they don't have the logistics tail that a lot of our big purchases come with.

[13:16] Matt Stavish: On a lot of the foreign stuff that we see, typically there's a prepay by the foreign government. The folks that work in that space a lot will see typically they don't need financing on the foreign receivables just because they get a prepay or pretty sizable upfront payment from the foreign entity.

[13:34] Richard C. Howard: Right.

[13:35] Matt Stavish: It's rare that they'd be like, yeah, we need this finance. It's very challenging, especially kind of in the current global environment that we're in right now. We don't do it. We know some folks that do, but it is certainly ups the scale and the financing difficulty.

[13:49] Richard C. Howard: Sure. I have a couple of questions that you may not plan at all. I'm just curious because I don't know the answers. As far as some of the maybe non traditional approaches that the government's taking to purchases, do you see any need for or have clients that are making requests that you're actually actively involved in with the SBIR program or even other transaction authority?

[14:13] Matt Stavish: Great question. Yeah, we actually just funded a company Silver Face Two contract that just kicked it off this week, and we funded the first receivable on that. And we funded a couple of silver phase three contracts. For us, it's just a government contract. We financed OTA contracts previously. Also, the procurement of an OTA is outside of the bar, but the financing mechanisms are so far based. Right?

[14:43] Richard C. Howard: Yeah.

[14:44] Matt Stavish: So for us, that's been fine. A couple of years ago, we actually financed a consortium sign an OTA contract. Interesting. And then they ended up using that to make sure that the entities doing the work, we got the working capital needed to execute. OK, so yes, with finance all that, our only thing that we tell folks is that on the server contracts and you're well aware of this, the milestones are very challenging to pre-fund because you don't know when they'll occur. The financing is fine, the financial milestone pre receivables hard. So we help folks if you have the ability to understand and have the conversation with your client, if you can generate a small receivable every month to your client in those silver contracts, that will help your cash flow. If you're billing month one and month four and it's a milestone for each one, it's hard for a lot of folks to come in a month two and three because what if you don't successfully complete milestone?

[15:52] Richard C. Howard: That's actually really good advice, right? So for anyone listening that has put a SBIR phase two proposal together, or maybe you're in the process of it now, a lot of them give you the flexibility to define your own milestones throughout the sober phase two. Just for anyone that's just maybe listening to this for the first time, SBI is a small business. Innovative research is usually the Defense Department or another federal agency funding a small business with both commercial and government potential solution, right? Sometimes it's a new technology, sometimes it's modifying an existing product or whatever technology for government use. Phase one usually is more of a research paper or analysis where phase two is what they're all trying to get to, which is that's where we're going from the $150,000 research phase one to maybe a million dollar plus phase two. And it certainly gets a lot higher than that if you have additional funds from the government to get that. Phase two, it's typically a proposal. You have a memorandum of an MOU, a memorandum of understanding from a government customer of some sort that says, yes, I like your potential solution, I'll sponsor it. Maybe you can do a demo at our base, whatever the specifics are, but then there's a list of your defining milestones in that proposal and typically that may be attached to MOU as well that's being signed off. So what your suggestion would be is instead of and I've seen a ton of these, right? You might see five milestones over an 18-month period where maybe you're just quickly trying to put the proposal together and hey, these are like the big chunks that we're trying to do. Maybe we're making modifications here, maybe the demos here, maybe analysis at the bottom. But what you're saying is, hey, let's try to build if it's a 14 month process, let's try to build 14 milestones so we can kind of build funding points into each month. Is that accurate?

[17:55] Matt Stavish: So it really depends. Can I have never written silver one, but just from a capital cash flow perspective. Let's say you have a million dollar silver over ten months just as an example and your payroll every month is thirty K a month for ten months. Try to get a 30K FFP perfect price milestone every month that covers your payroll and then you have your big milestones. When we deliver the acceptable product I get to build 400K. That's great. Try to get something in there that's perfect price or type of labor because typically the firms that are getting silver faced too, some are very well capitalized with other cash flows and whatnot some are not, right? And so try to work with your government official in a manner that there's going to be either very easy to accomplish milestone or a very small FFT component that hey, I've had these folks do these work and I need to generate a receivable of some sort. But just thinking that out ahead of time, whatever it looks like. But just know that if it's not us and even other people at your local bank, if you're billing on September 21 and your next receivable is December 15, it's really hard to fund in between those when it's a milestone base.

[19:17] Richard C. Howard: Right.

[19:18] Matt Stavish: Because the acceptable receivables on the outcome of the completed milestone.

[19:23] Richard C. Howard: Correct.

[19:25] Matt Stavish: And so it's really a mix of like it's not really short term working capital because it's a longer term outcome. So it's just things that people should think about ahead of time. We have a couple of clients on SBIRs and they are real good on they try to get a big milestone right up front, gives you cash flow then they kind of model it out another client. They try to do a little bit of chunks every month but it's really just things to think about. It's not a guaranteed outcome that you're going to always hit it. It's not a guaranteed outcome that can be funded. It just makes it generally a little bit easier.

[20:01] Richard C. Howard: Interesting. So I have one final question and then maybe any thoughts you have that you want to give to the audience as we're kind of moving on but have you had a client on contract with the government that experienced a termination for convenience and then had to go through a little bit of a process there? What are your thoughts on that topic and kind of moving through the financial play there?

[20:28] Matt Stavish: Sure. So very generally not being an attorney, we always tell people engage a GovCon attorney like GovCon attorney, not an attorney that does GovCon because that will be very helpful to you. There's some CPA firms also that we know that our GovCon CPA firms would have a lot of expertise in working on T for C cells. Generally in the financing space you'll generate an invoice for the termination convenience for funds that were that you're owed. That's not something that most folks will finance. We won't finance it okay. Because it takes a long time to get paid back, right? So typically people you can get financing on the receivables that you do your typical month or TNM or FFP or Cost plus whatever it may be and then those get paid normally. But that last keeper see kind of invoice we won't fund. I don't think it's a good idea for folks to fund it because typically in finance, if it goes out 90 days, that's a problem and typically those take a lot longer than 90 days from what I've heard from a funding to get paid back perspective. And I guess there's some negotiation involved too and what that final number would be. Sure. So generally we've seen it, we don't fund it. I think people should always just engage folks who really know that space really well. What I've seen a good gut on attorney and a good gun, CPA has been through that process before, can expedite when that payment gets to you, but I don't think it's a swift resolution.

[22:13] Richard C. Howard: All right, good. I was curious if you guys funded any of that and what your thoughts are. I agree with everything you said, termination for convenience. So for those that don't know, the government is the 800-pound dealer in the room so they can terminate any contracts. Although government contracts tend to be very stable, they can cancel a contract for any reason but you're not left holding the bag so you can talk to an attorney. We've had some consulting services too. We have contracting officers will generate the response. I guess my point would be a company small business, if a contract is canceled, you're not left necessarily without any funding. In fact, our last client, I think she ended up with about 90% of the total contract value even though they didn't perform the work. But you definitely want to talk to some experts and there are plenty of people out there but you're right, don't talk to someone that does it as a side gig. If you're talking to a lawyer, make sure that's their focus and that's their specialty or maybe a former contracting office or something like that. Excellent. Those are my main questions. This is really good and extremely helpful because I always say for me it's kind of fun the hunt of going on contract, whether it's the Department of Defense or another agency and developing the relationships and winning your proposal if you had a public solicitation that was competed. But the real work starts to once you're on contract with the government because that's where you really start. Especially if you have maybe a multi year contract and you have a whole host of questions and this is a big one. This is one of the biggest ones when you first go on contract is hey. How am I going to fund everything while we're waiting to get paid from the government. Government is usually pretty good about paying but there is a delay there and you have to be prepared for that. So it sounds like you and Republic provide that service very well. And it's something that I think a lot of people listening to this could potentially be interested in. Maybe you could tell us, hey, how can they contact you? And maybe some parting thoughts?

[24:14] Matt Stavish: Sure. So parting thoughts first. So the financing finish line, getting your financing set up either at a bank or us or whoever, we want to all walk across that finish line. So what does that mean? That means that if you think that you're going to need money for payroll in 30 days, now is exactly when you should start getting everything set up. Don't wait till two weeks out or a week out. We've all funded people in under ten days. And that's a nice success story, but it's super stressful for the company and for us for that matter. So plan ahead if you all your banker or we will have conversations with people pre award, hey, I may win this. If I win this, I'll need X. What can we do before the award? Because then it will be really busy to get this set up so that if we win, we turn it on. But if we don't, that's okay. And that's fine. That's something that we do a lot, especially this time of year. But it's getting us ahead of the curve is from the company is not just worrying about getting financing. Once you get the award, you're recruiting, you're hiring rebadging. There's a lot of stuff that's going on and this is just now another thing. So we all want to get ahead. Have conversations with your financial source like, hey, I'm looking at this, we're going to go from 1 million in revenue to four. Can you fund that? How would that look? Is that something that you can do? Can't do. Let's talk about that. What are the options? How do we do that? Those are all things that you should have regular conversations with your financing source, banker or someone like me just to keep everything moving. And then that will help you identify and look around the curve if there's any footballs. The last thing is with regards to the government as the most detail-oriented customer ever, federal Acquisition regulation is really big as you want to work with folks that have worked in the space before. There is some language in the Far, Richard knows federal Assignment of Claims Act back and you want to make sure someone they know exactly what all that stuff means and that they speak Far, they follow the Far, you know, do assignments of claims, that sort of thing. I think that's a really good way to kind of go about stuff and work and look the government best way to contact me there's couple of different ways. Reach out on LinkedIn. I can be linked on this podcast. Shoot me a message. You can go to our website republiccapitalaxis.com, fill out the contact form, we'll get in touch with you, and then I'll send you my email to put in the chat box. But it's m Stavish. Stavish at Republic Capitalaccess.com and we'll get back to folks and love to have conversations and see how we can be helpful as folks grow their business. The credit markets now are a lot different than they were eight months ago, so it's a little bit different environment for reasons we all know.

[27:19] Richard C. Howard: Yeah, no, that's for sure. Well, hey, Matt, we really appreciate you taking the time to come on here and talk about your specialty, something that I think every small business owner hopes have this problem right as we move forward and win contracts. So that's great. We're going to put everything in the show notes on how to contact you as well. And yeah, thanks again, really appreciate it. We look forward to the next conversation.

[27:42] Matt Stavish: Thank you.

If you have any questions, feel free to reach out to us here and we will get back to you as soon as we can.

You can also check out our episode on Defense Contracts for Real Estate Agents where we dive into government contracts that are being awarded for real estate related purchases. We looked at how much is being spent, which agencies are making the purchases, how they made the purchases and some tools you can use to get started.