Bidding for government contracts can be a great way to grow a small business. Government agencies at the federal, state, county and city level purchase every type of good and services. If you sell a product or service, there is a big chance that the government buys it.
Government agencies have mandates to work with small businesses. These mandates level the playing field and create a great opportunity for companies that know how to operate in this marketplace.
However, finding a government contract is actually the easy part the engagement. It’s the fulfillment and delivery of the contract where small businesses usually run into problems. This is because few companies have the needed funding to fulfill their government contracts. This puts them in a position to fail.
Common financial problems
Few business owners ever consider that winning a government contract can also create financial problems. But, even small government contracts can be large by small business standards. They can drain your resources and be financially demanding. Unless you prepare for this, you will run into cash flow problems. Two common problems are:
Problem #1: Your cash flow suffers due to slow payments
Most government agencies pay their invoices in net-30 to 60 days. Few small business owners take this into account when bidding for large contracts. However, it can have serious consequences.
Your company must be able to pay the expenses associated with fulfilling the government contract. Then, it must be able to wait 4 to 8 weeks for payment. This can be difficult if you hired additional staff or if your company does not have a cash reserve. It could leave you unable to pay employees or suppliers on time.
Problem #2: You don’t have enough money to pay your vendors
Another problem is that you may not be able to afford to pay your vendors. Most small product re-sellers and wholesales have to prepay their suppliers whenever they buy products. But if they don’t have the funds to prepay vendors, they won’t be able to purchase goods. Consequently, they may not be able to fulfill their government purchase order.
Get your financing before bidding
If you are going to need financing, it is important to get it before you submit your bid. Getting funding can take anywhere from a few weeks to a few months. Having this resource in place before submitting the bid will help you avoid potential delivery problems later on. Basically, you want to avoid a situation where you have won a bid but do not have the funding to execute it.
One logistical advantage of getting funding before bidding is that it will make financing the project easier. Most government contract finance solutions rely on the assignment of claims act for payments. Setting the proper assignment when you first submit a bid is relatively simple. However, changing the proceeds assignment after a bid is submitted can be a time consuming process that depends on a specific contracting officer.
Government contract financing
Here is a list of five effective solutions that can help you finance your government orders. These five solutions are easier to get than conventional financing, and can be used by small businesses. Most are very flexible and well suited for growing government contractors.
Option #1: The Small Business Administration
One effective way to finance government projects is to use the solutions offered by the Small Business Administration. They have a number of products that can help small and midsized companies.
Companies that need a very small line of financing should consider Mircoloans. These lines go up to $50,000, though limits vary by state. They are easier to get than regular bank loans and are ideal for entrepreneurs who are just starting out.
Larger businesses should consider CAPLines which are a special type of 7(a) loan. CAPlines can go up to 5 million dollars and can be structured in many ways. Note that the SBA does not lend money directly. Instead, they provide guarantees to banks who are willing to underwrite the loans.
Option #2: Purchase order financing
Purchase order financing helps wholesalers who have large purchase orders and need funding to pay suppliers. A po financing program allows you to cover the supplier costs associated with a specific government purchase order. This enables you to fulfill the order and book the revenue. The line is flexible and is designed to accommodate growing orders.
Purchase order finance can work only with wholesales who resell products. Unfortunately, it can’t be used by manufacturing companies (other options listed below). This solution works best for orders that have higher profit margins, usually above 20%. Setting up a line is relatively easy and can take a couple of weeks.
Option #3: Invoice financing / AR Factoring
Accounts receivable factoring helps eliminate cash flow problem due to slow paying invoices. An invoice factoring program that specializes in government receivables allows you to finance invoices and can provide the cash flow to pay for operating expenses. One advantage of factoring is its flexibility. The line can grow as your revenues from government projects increase. Qualifying for a factoring program is relatively simple, especially for government contractors. Setting up the line takes a week or two. This makes it an ideal option for government contractors.
Option #4: Inventory financing
One alternative to fund a government purchase order is to finance your inventory. This can help manufacturing companies that need funds to fulfill a government contract. This solution works best for larger companies due to it’s cost and implementation requirements.
Setting up a line requires an inventory assessment, which can take a few days and be expensive. Once the line is in place, the company needs to have the accounting systems in place to properly manage inventory. Lastly, the inventory financing line itself can be more expensive than other options. Often, inventory financing is used in combination with factoring or other solutions.
Option #5: Asset based lending
Larger and more established companies that need financing should consider asset-based lending as an alternative. These lines enable you to finance your company’s main assets – accounts receivable, inventory and equipment. Asset based financing lines can be structured to resemble lines of credit or term loans, based on the underlying asset that is financed.
Asset based loans are used by growing companies that have established financial controls, but can’t qualify for a conventional line of credit. This solution is available to companies that have a minimum of $1,000,000 of monthly revenues.
Get more information
We are a leading provider of factoring, asset based lending and PO financing for government contractors. For more information, get an online quote or call (877) 300 3258 to speak with an expert.