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 service. If you sell a product or service, there is a good 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 experience problems. These problems arise because few companies have the funding necessary to fulfill their government contracts. This lack of funding 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. Their financial demands can drain your resources. Unless you prepare for these demands, you will encounter 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, this payment delay 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 wait 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 wholesalers have to prepay their suppliers when 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 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 helps 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 makes 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 are five effective solutions for financing 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 are 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 (SBA). The SBA offers a number of products that can help small and midsize companies.
Companies that need a very small line of financing should consider Microloans. These lines reach a maximum of $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 range up to five million dollars and can be structured in many ways. Note that the SBA does not lend money directly. Instead, it provides guarantees to banks that are willing to underwrite the loans.
Option #2: 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 timeline makes factoring an ideal option for government contractors.
Option #3: 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 funding 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 wholesalers 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 #4: Supplier financing
Supplier financing helps small and midsize manufacturing companies and product distributors that have government purchase orders and need to pay suppliers. It’s a form of supply chain financing in which the finance company provides credit to your company and intermediates your supplier purchases. Here is information on how it works.
This product works with companies that have established a track record and have at least three years of operations history. An important advantage of supplier financing is that it works well with your existing financing. When used correctly, it can extend your capabilities and allow you to fulfill more orders or build inventory.
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 with established financial controls but can’t qualify for a conventional line of credit. This solution is available to companies generating a minimum of $1,000,000 of monthly revenues.
Get more information
We are a leading provider of factoring, asset-based lending, supplier financing, and PO financing for government contractors. For more information, get an online quote or call (877) 300 3258 to speak with an expert.