If you are looking for a way to grow your small business, consider bidding for government contracts. After all, agencies at all levels of the government purchase goods and services- so, if you sell a product/service, chances are the government buys it.
When it comes to government contracting, finding the contract is easy. The area where companies usually have issues is the fulfillment and delivery of the contract. This is because most companies don’t have the funding needed to fulfill the contract. In this article, we’ll go over six financial solutions to this issue.
Common Financial Problems
Very few business owners would consider that government contracting could cause financial issues. These issues are caused because even the small contracts can be large by small business standards. The financial demands of the contract can drain your resources. The two most common financial issues are:
Slow payments cause cash flow to suffer: most government agencies pay in net-30 to net-60 days. This can have a detrimental effect on your cash flow.
You can’t pay vendors: when you purchase from your vendors, you have to pay them. If you don’t have the funds, you can’t pay- which means you can’t fulfill your order.
Obtain Financing Before Bidding
If you need financing, you should get it before submitting a bid. If you have this resource in place before bidding, you can avoid delivery issues later on. After all, you don’t want to find yourself in a situation where you win a bid but can’t execute the contract.
Financing Solutions for Government Contracting
Below are 6 solutions to finance government orders. They are easier to obtain than traditional financing and can be used by small businesses.
Small Business Administration
The SBA has several programs that can help small to mid-size companies. These companies should consider a microloan. They are ideal for companies that are just starting out and are easier to obtain than a regular bank loan.
Larger businesses should consider a CAPLine, which is a special type of 7(a) loan and can go up to $5 million and can be structured in many ways.
The primary challenge when it comes to government contracting is cash flow issues. This can be solved by financing your invoices through an invoice factoring program specializing in government receivables. This gives you the funds you need while you wait for payment.
Accounts Receivable Line of Credit
This solution is a great option for companies that invoice at least $300,000 per month and have a good track record. It is for companies that are not quite ready for bank financing but have outgrown factoring. The benefits of accounts receivable line of credit are similar to those that come with factoring and will grow with your sales, as long as you have positive accounts receivables.
Purchase Order Financing
This option helps wholesalers with large purchase orders and can only be used in transactions involving the sale of a product. It cannot be used to fulfill orders providing a service. Purchase order financing works for orders with high profit margins and setting it up is fairly easy.
This option is for small to mid-size manufacturing companies/distributors involved in government contracting that need to pay suppliers. It is a type of supply chain financing in which the company provides credit to your company and intercedes purchases from your suppliers.
Asset-based lending works for larger, established companies that need financing. This can allow you to finance the main assets of your company: equipment, accounts receivable, and inventory. Asset-based lending is used by companies that have financial controls in place but don’t qualify for conventional funding. You need at least $1 million in monthly revenues.
The type of financing you use for your government contracting is dependent on the size of your company, your financial situation, and the transaction. If you want to know more about your options, contact Achieve Capital Advisors. We can help you with your funding issues.