Backlog financing and working capital
Working capital facilities and financing against orders or invoices submitted to the customer, by the milestones of the contracts, so you can take the next contract without waiting for payment on the last one.
DEFENSE & DUAL USE
Financing and capital raising for defense companies: equity, debt, backlog and M&A
SBC advises Israeli defense and dual use companies on equity and debt raising, backlog financing, international partners and M&A. We fit the process to classification and regulation and run a competition among suitable parties. SBC does not lend. In financing our fee is success based; in capital raising and M&A it depends on the scope of the work.
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A growing defense company soon finds that a signed contract is not yet money in the bank. To receive an advance it must provide a guarantee, to perform the contract it needs a performance guarantee, and meanwhile it buys materials, hires engineers and expands production. Payment comes by milestones, sometimes long after the expense. As the backlog grows, the gap grows with it.
Every capital move in such a company also raises questions other sectors do not have: who may see the information, who may hold shares, where the company may sell, and which approval is needed before talking to a foreign partner. We build the process around these questions. Our role is advisory and support, and where needed acting with the parties under a power of attorney from you.
How we support defense companies
Performance, advance payment and bid guarantees
How many guarantees will be open at any time, which party issues each one and what collateral it requires, so that guarantees do not take up the whole credit facility.
Equity raising
Private equity funds, family offices and strategic investors, for growth, expanded production or an acquisition. We map in advance who is allowed and interested to invest in the sector.
Debt and structured financing
Senior debt, mezzanine and refinancing of existing debt, for a new facility, expanded production or an acquisition, from bank and non bank sources.
International partners
A partner for distribution, a joint bid, production in the target market or an investment in the company, with marketing and export approvals built into the timetable.
Mergers and acquisitions
Selling all or part of the company (sell side), buying a complementary company (buy side) or bringing in a partner, with due diligence that respects the limits of classification.
Backlog financing: why a signed contract is not yet cash
In a defense contract, money goes out long before it comes in. The company bids with a bid guarantee, signs, provides an advance payment guarantee to receive the advance and a performance guarantee for the term of the contract, and after delivery sometimes a warranty guarantee too. In between it finances materials, salaries and subcontractors until the next milestone.
This is where the bank becomes the issue. A bank guarantee is recorded as exposure within the company’s credit facility even when nothing has been drawn on it, and sometimes comes with a demand for collateral or a deposit. A company with a large backlog can find its facility full of guarantees, with no room left for the next contract.
So we start from one table: all the contracts, milestones, guarantees and expected payments, month by month. It shows when cash runs short and how many guarantees are open at any time, and it is what we take to the lenders. The credit capacity calculator on this page gives a first estimate of how much debt the company can carry.
- Bid guarantee: submitted with the bid, as security for the customer that the company will sign if it wins.
- Advance payment guarantee: against the advance the customer pays, usually reduced as the advance is offset against payments.
- Performance guarantee: security for the customer that the company will perform the contract, for its whole term.
- Guarantees from other issuers: insurance companies also issue certain types of guarantees, which can sometimes free up room in the bank facility.
Raising capital for defense and dual use companies: who invests and what they check
Not every investor can invest in a defense company. Some funds have investment policies that limit or prohibit investing in the sector, while others specialise in it. Approaching an investor whose mandate does not allow the deal exposes the company for nothing, so we map before we approach.
In a dual use company, whose technology serves both a civil and a defense market, the civil side can widen the investor base and spread the revenue. We present the two sides separately: revenue, profitability and backlog, and the export limits of each product line.
When presenting a backlog, it helps to show how much of it will turn into cash and at what margin, not only its size. Equify (equify.co.il), the SBC valuation engine, runs four models, including DCF and market multiples, and is calibrated to the Israeli market.
- Backlog quality: signed contracts, orders under framework agreements and opportunities not yet closed, each one separately.
- Concentration: how much of the revenue depends on one customer, one programme or one country.
- Licensing: which products may be marketed and exported, and where, and whether components from abroad bring export limits of their country of origin.
- Intellectual property and supply chain: who owns the knowledge developed, and the dependence on a single supplier or component.
- People: key managers and engineers, and the security clearance they hold.
Classification, foreign partners and approvals
A defense company has two layers of information. The first can be shared after a non disclosure agreement: statements, business model, markets and backlog data in aggregate. The second is sensitive or classified: customer identities, specifications and programmes. The teaser, the deck and the data room are built from the first layer only.
Classified information is shared only with those authorised to receive it, through the channels the security authorities have set. What may be shared, with whom and when is decided by your security officer and your lawyers, and we plan the process so that sensitive information comes in only at a late stage, with authorised parties.
A deal with a foreign party may require approvals: for marketing and export, for transfer of knowledge and sometimes for a change in ownership. We check what needs approval and at which stage, build the timetable around it, and the required approvals are written into the agreement as conditions to closing. Defense exports from Israel are supervised by the Ministry of Defense, and some dual use products and technologies are supervised as well.
How we work with you
Diagnosis
A conversation with one of the partners on the goal: a raise, backlog financing, a partner or a deal. We read the statements, the backlog and the structure of credit and guarantees, and agree with your security officer what may be shared, with whom and at which stage.
Documents
A backlog and milestones table and a cash flow forecast, and for a raise or a deal also a teaser, a deck, a financial model and a data room, only from information that may be distributed. Unclassified documents go through the secure upload on the site. Classified information is never uploaded to the site.
Submission and competition
Out of the about 40 lenders and investors we work with, we choose those that fit the financing of a defense company, and for a raise or a sale we map investors and buyers. We approach them in parallel, under a non disclosure agreement and a code name, so that the offers arrive together.
Negotiation and closing
We compare offers by total cost, collateral, covenants and the room the guarantees take in the facility, not only by the rate. We lead the negotiation and coordinate with the lawyers, the accountants and the security officer until signing.
Support after closing
The backlog changes, and with it the need for facilities and guarantees. After closing we are available to update the financing as new contracts are signed, and to plan the next raise or deal.
What we need from you
- The goal: a raise, backlog financing, a partner or a deal, and its size
- Audited financial statements for recent years and a current interim report
- A backlog table: signed contracts, milestones and expected payments
- The credit facilities, loans, collateral and open guarantees
- A cash flow forecast for the coming year, even as a draft
- The marketing and export licensing status of the main products
- A contact for classification matters, usually the security officer
- For a raise or a deal: the ownership structure and the cap table
Calculator
How much credit can your business raise? A DSCR calculator
This SBC calculator estimates how much additional debt a business can carry, from its operating profit, its existing payments and the debt service coverage ratio you set. It turns the free payment capacity into a loan range at an assumed rate and term. The range is indicative only: each lender reads the business by its own rules.
An indication only, not an offer and not a commitment. Actual terms are set by the lender, based on the full file.
Principal and interest of all existing loans and facilities, per year.
How many shekels of operating profit there are for each shekel of yearly debt payments. Each lender sets its own threshold, by business and deal.
An assumption to test, not a rate we offer.
The result
- Indicative range
- ₪4.44M to ₪6.96M
- Mid range
- ₪5,822,286
- Monthly payment that fits
- ₪116,667
- Coverage today
- 4.17
Indicative range: ₪4.44M to ₪6.96M. Monthly payment that fits: ₪116,667.
Operating profit divided by 1.25 gives the yearly payment the business can carry. Existing payments come off, and the rest becomes a loan amount at the rate and term. The range moves with how conservative the lender is.
Conservative: ₪4,436,027, Middle: ₪5,822,286, Flexible: ₪6,956,498.
Questions and answers
How do you finance a backlog in a defense company?
With a combination of tools: a working capital facility between milestones, guarantees from different sources, and financing against customer invoices or approved orders. The starting point is a table of the contracts, guarantees and expected payments, month by month, presented to several parties in parallel.
What is the difference between a performance guarantee and an advance payment guarantee?
An advance payment guarantee is given against an advance the customer pays, and protects the customer if the contract is not performed after it has paid. It usually shrinks as the advance is offset against payments. A performance guarantee protects the customer for the whole contract, in case the company does not meet its obligations. Many contracts require both.
Why does the bank not increase the facility when there are signed contracts?
Because the bank also looks at today’s exposure, not only at future income. Guarantees are recorded in the facility even when no money has been drawn, and concentration in one customer and long payment cycles are part of the decision. Sometimes the answer is the right split: guarantees from another issuer, financing against invoices or another lender alongside the bank.
Can a foreign investor invest in an Israeli defense company?
It depends on the field of activity, the customers, the classified information the company holds and the identity of the investor. A foreign shareholder may require approvals from the security authorities and may affect existing contracts, so we check it with the lawyers and the security officer before approaching an investor.
How much does the advisory cost?
The initial review is free of charge. In financing our fee is success based; in capital raising and M&A it depends on the scope of the work. The structure is agreed with you in advance, before the work starts.
Is approval of the financing, or closing of the deal, assured?
No. The decision whether to lend, invest or buy, and on what terms, belongs to the lenders, investors and buyers, and in some deals also to the authorities. Nobody can promise it in advance. SBC does not lend: we prepare the company and run a competition among the parties that fit.
Want to check this on your own numbers?
A first conversation and an initial review, at no cost. In financing our fee is success based; in capital raising and M&A it depends on the scope of the work.
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