Overview
FAR Subpart 32.3 outlines the policies and procedures for "V loans," which are government-guaranteed loans made by private financial institutions to contractors performing work essential to national defense. These guarantees, authorized under the Defense Production Act of 1950, serve as a specialized financing mechanism when conventional credit is unavailable but the contractor's performance is vital to national security.
Key Rules
- The "V Loan" Structure: These are private loans where a federal agency (e.g., DoD, NASA, DOE) agrees to purchase a percentage of the loan from the lender and share losses if the contractor defaults.
- Guarantee Percentage: Guarantees are typically for less than 100% of the loan. A 100% guarantee is only permitted in exceptional circumstances where the contractor is vital to national defense and no other financing exists.
- Certificate of Eligibility: A loan guarantee cannot be authorized without a formal certification that the services are essential, the contractor is technically capable, and (for large businesses) no other practicable source exists.
- The Asset Formula: Loans are generally limited to a specified percentage (usually 90% or less) of the contractor’s actual investment in defense production (payrolls, inventories, etc.), minus any progress payments received.
- Assignment of Claims: Borrowers are generally required to execute an assignment of claims, meaning the government payments for the contract are directed to the lending institution to secure the loan.
- Surety Bond Conflict: Because surety bonds and loan guarantees often compete for the same collateral, agencies will not authorize a guarantee on a bonded contract unless the surety company agrees to subordinate its rights to the loan.
Responsibilities
- Contracting Officer (CO):
- Prepares the Certificate of Eligibility for contracts of material consequence.
- Evaluates if alternate sources for the supplies/services exist.
- Reports any adverse information about the contractor’s financial health to the agency finance office.
- Guaranteeing Agency (e.g., DoD, GSA, NASA):
- Determines the contractor's eligibility and reviews the terms of the guarantee.
- Fixes the maximum dollar amount and maturity date of the loan.
- Federal Reserve Board & Banks:
- The Federal Reserve Banks act as fiscal agents for the United States.
- The Fed conducts credit investigations, transmits applications between lenders and agencies, and executes the final guarantee agreement.
- Private Financial Institution:
- Disburses the funds, collects payments, and handles the day-to-day administration of the loan.
- Contractor (Borrower):
- Must demonstrate that funds are necessary for national defense performance and provide required documentation/collateral.
Practical Implications
- Last Resort Financing: V loans are not meant to compete with the private market; they are a "lender of last resort" tool used to sustain the industrial base when a critical contractor faces a liquidity crisis.
- Bridge to Settlement: This subpart is particularly useful during Terminations for Convenience. If a contractor’s capital is tied up in a terminated defense contract, a V loan can provide the cash flow necessary to keep the company solvent until the final termination settlement is paid.
- Small Business Advantage: Small businesses are exempt from the "no practicable alternate source" requirement, making it easier for the CO to justify a loan guarantee for a small firm than for a large prime contractor.
- Subcontractor Support: The regulation encourages prime contractors to provide progress payments to weak subcontractors to avoid the need for a government loan guarantee, shifting the risk from the taxpayer to the prime contractor.