Bidding for government contracts can be a great way to grow a small business. Government agencies at the federal, state, county, and city levels purchase every type of good and service. If you sell a product or service, there is a good chance that the government buys it.
However, finding a government contract is actually the easy part. 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. In this article, we discuss six financial solutions to this problem. We cover:
1. Common financial problems
Few business owners ever consider that winning a government contract can also create financial problems. This is because even small government contracts can be large by small business standards. The contract’s financial demands can drain your resources. Unless you prepare for these demands, you will experience cash flow problems. The two most 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 payment delay into account when bidding for large contracts. However, slow payments can have serious financial 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 for the project 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 you don’t have the funds to prepay vendors, you won’t be able to purchase goods. Consequently, you may not be able to fulfill your government purchase order.
2. Get your financing before bidding
If you need financing, it is important to get it before you submit your bid. Getting government contractor financing 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 time-consuming and depends on a specific contracting officer.
3. Financing options
Here are six effective solutions for financing government orders. These six solutions are easier to get than conventional financing and can be used by small businesses. They are very flexible and are well-suited for growing government contractors.
Option #1: The Small Business Administration
The Small Business Administration has several programs designed to 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: The SBA does not lend money directly. Instead, it provides guarantees to banks that are willing to underwrite the loans.
Option #2: Invoice financing
The main challenge for most government contractors is having cash flow problems due to slow invoice payments. An invoice factoring program that specializes in government receivables solves this problem by financing your invoices. This solution provides funds to run the business while you wait for payment. To learn more, read “What is Factoring?”
Qualifying for factoring is simple. Factoring lines are available to small and growing businesses that don’t meet conventional banking requirements. Setting up the facility takes a week or two. This timeline makes factoring an ideal option for government contractors.
Option #3: Accounts receivable line of credit (sales ledger financing)
Sales ledger financing is a solution that operates much like a line of credit secured by accounts receivable. It’s a great alternative for companies that invoice a minimum of $300,000/month and have a track record. This solution is an option for companies that have outgrown factoring but are not ready for bank financing. Sales ledger financing lines have similar benefits to factoring lines and can grow with your sales as long as you have quality accounts receivables.
Option #4: Purchase order financing
Purchase order financing helps product wholesalers who have large purchase orders. It can be used only in transactions in which your company sells a product. PO financing cannot be used to fulfill orders that provide a service.
PO financing programs allow 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.
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 #5: Supplier financing
Supplier financing helps small and midsize manufacturing companies and distributors with government purchase orders that need funds 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. To learn more, read “What is Supplier Financing and How Does it Work?”
This solution 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 #6: Asset-based lending
Larger and more established companies that need financing should consider asset-based lending as an alternative. Asset-based financing lines can be structured to resemble lines of credit or term loans, based on the underlying asset that is financed. These lines enable you to finance your company’s main assets – accounts receivable, inventory, and equipment.
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 generating a minimum of $1,000,000 of monthly revenues.
The type of financing you get depends on the size of your company, the type of transaction, and your financial situation. Companies that need to improve their cash flow should consider invoice factoring and sales ledger financing. Companies that need funds to pay suppliers should consider purchase order financing and supplier financing. Lastly, larger companies with established track records should consider an asset-based loan.
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.