Government Shutdown Impacts Government Contractors’ Lines of Credit
January 11, 2019
Shulman Rogers’ Commercial Lending Practice is experiencing a sudden spike in business from its banker and government contractor clients alike – the reason being that both are concerned about the impact that the federal government’s shutdown is having on the government contractor’s ability to pay its debts and operating expenses as they become due.
“We are hearing from both our lender and borrower clients with urgent requests for us to assist with documenting temporary increases to existing lines of credit. The line increases appear to be desperately needed, mostly by small and mid-sized government contractors who rely on the federal government for business, to meet their next payroll obligation and fund essential operating expenses,” said Matt Bergman, Chair of the firm’s Commercial Lending Practice. “They are just trying to stay afloat while much of the federal government remains shuttered.”
There are two critical aspects of these working capital lines of credit in play. On one hand, bankers should proactively take steps to have their legal counsel properly document temporary line increases. If a customer’s line of credit is temporarily increased without proper documentation in place, the bank risks its ability to legally enforce the customer’s repayment obligation should its customer fail to repay the loan when due. On the other hand, government contractors are finding themselves making a tough decision – which of their vendors should be paid with the limited amount of cash on hand or limited line of credit availability, and which accounts payable will need to fall past due? It’s an even tougher decision when the primary operating expense facing the government contractor is a looming payroll obligation.
The key is to anticipate, be proactive and plan ahead. Government contractors should reach out to their bankers now so that their bankers will have enough time to get a temporary increase in line of credit availability approved and documented by the bank’s attorneys. Bankers should closely monitor their government contractor customers’ line of credit usage and outstandings to evaluate whether their customers will potentially run up against and/or tap out the maximum principal amount of their line of credit.
The Commercial Lending Practice is actively working on behalf of banks to document temporary line increases and on behalf of government contractors to document corporate authorizations, which banks customarily require for line increases.
The contents of this Alert are for informational purposes only, and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Commercial Lending Practice.