With high-tech businesses sprouting up around the nation's capital to pursue federal contracts, a local start-up is pinning its hopes on a uniquely Washington line of business: government contract lending.
James Monroe Bank opened across the Potomac in Arlington, Va., three months ago. Buoyed by the knowledge that the federal government buys many of its goods and services from vendors in its own backyard, the bank has launched a division that finances companies bidding for Uncle Sam's business.
"To ignore this market is not smart," said John Maxwell, president and chief executive officer of James Monroe.
Still, James Monroe will hardly have a lock on the market. At least three other community banks-Acacia Federal Savings Bank in Falls Church, Va., Virginia Commerce Bank in Arlington, and Sequoia National Bank in Bethesda, Md.-have all strengthened government lending divisions of late.
The push into government contract financing-a form of asset-based lending whereby banks lend companies money against the value of their contracts-is driven by the numbers.
Last year the government awarded contracts worth $62.7 billion in Maryland, Virginia, and Washington, up 5.6% from 1996. That compares with a 2.4% increase nationwide.
And since 1983 the region's share of the national procurement dollar is up to 11.4%, from 4.4%, according to statistics compiled by George Mason University's Institute of Public Policy.
As a result, more than new 700 technology firms sprang up in northern Virginia alone between 1992 and 1997, many of which target government agencies.
First Union Corp.'s acquisition of Signet Banking Corp. last year also opened the door for community banks.
Richmond, Va.-based Signet had long been recognized as the market leader in government contract finance. But First Union had decided to focus on larger loan deals, leaving some of the small- to- middle-market deals for the taking.
"The regional lending market is still there, but the banks are not," said Bob Martins, vice president and manager of commercial lending at $600 million-asset Acacia.
He said he wants government contract lending to compose 50% of the bank's commercial loan portfolio within the next three years, up from less than 10% now.
Many of Washington's smaller banks already make small-scale government contract loans, but local bank executives said they intend to pursue loans between $1 million to $5 million, focusing on systems integrators, software developers, and other technology firms with annual revenues of $5 million to $25 million.
Though industry observers say the government contract market is booming in Washington, this type of financing can be a risky. Money is typically lent up front to upstart companies that are undercapitalized, rapidly growing, and fully leveraged.
But bankers agree that if government contract lending is done right, it can become a profitable piece of business for the bank.
"These companies go through ups and downs, and if you stick with them, government contract lending can become a great part of your bank," said Mark Moore, a senior vice president at United Bankshares in Fairfax, Va., who formed the government lending unit at George Mason Bankshares in 1993, before it was bought by United last spring.
What started with just a handful of clients, Mr. Moore said, has now developed into 20% of the bank's commercial loan portfolio in the Washington region.
Bankers say the most important step in government contract financing is company underwriting. Banks run the risk of dealing with fraudulent invoices, unfinished contracts, and cost overruns. They must also handle complex government documentation and frequently review hourly billings and completed work.
Besides the massive amount of direct federal spending in the Washington region, what also attracts banks to this lending are slightly higher spreads than with other types of commercial loans, and administrative fees.
There's an added bonus as well. Customers tend to steer other business to banks that finance their government contracts, said Gary Hobert, a Washington-area lender and now executive vice president at James Monroe.
"I've found that there is more loyalty among these companies than other types of commercial loans," he said.