The Joint Venture Financing Conundrum
Matt Stavish, Vice President, Republic Capital Access
For more information on the GovCon Initiative, click here.
Government Contractors looking to gain a competitive advantage are utilizing Mentor / Protégé relationships and subsequently forming unpopulated joint ventures to go after opportunities. The joint venture or shell company can create a cash flow crunch to one or more of the parent companies. 
The set-up of the cash crunch lies in the structure; the JV has no employees. All the W2 employees exist in the parent companies. The parent company is responsible for paying the employees working for the JV, while waiting up to 60 days for the JV to receive payment. So the question is: how can a contractor advance the receivables?
To finance a JV there are two traditional options:
1. One of the partners can provide a personal guarantee, which can create an unequal sharing of risk.
2. Use your existing bank line of credit. However, most banks will not allow the receivables from a shell company into the borrowing base of the parent company.
A third and innovative approach can be selling the JV’s receivables in a non-recourse manner.
The cautionary tale to contractors is determine how you will finance the work on the JV prior to award. As this is different legal entity and has special considerations different from your operating business.
For more information on the GovCon Initiative, click here.