Overview
This section details the administrative workflow and eligibility criteria for obtaining government-guaranteed loans (V-loans) to support national defense contracts. It defines the roles of the Federal Reserve, the contracting officer, and the guaranteeing agency in evaluating financial need, technical capability, and the essentiality of the services provided.
Key Rules
- Application Workflow: Contractors apply to private financing institutions, which then coordinate with the Federal Reserve Bank and the Federal Reserve Board to reach the relevant guaranteeing agency.
- Certificate of Eligibility: The Contracting Officer (CO) must certify that the supplies/services are essential to national defense, the contractor is capable, and (for large businesses) no practicable alternate source exists.
- Asset Formula: Guarantees are typically limited to 90% or less of the contractor's investment in defense production (e.g., payroll and inventories), excluding work not yet performed or cash collateral.
- Assignment of Claims: Contractors are generally required to execute an assignment of claims under the defense contracts to secure the loan, unless they possess exceptional financial strength or the administrative burden is too high.
- Surety Bond Conflict: Because surety bonds and government guarantees can conflict, a guarantee will generally not be authorized on a bonded contract unless the surety subordinates its claims to the financing institution.
- Other Borrowing: While discouraged, contractors may obtain additional outside financing if they accept limits on the amount and provide the agency with secondary collateral and 30-day disclosure reports.
Practical Implications
- Contractors must maintain rigorous financial records and performance schedules, as the government uses an "asset formula" to strictly limit the loan amount to actual investment in the work.
- Small businesses benefit from a streamlined eligibility process because the government waives the requirement to prove that no other practicable source for the acquisition exists.