Government agencies at all levels- city, county, state, and federal- purchase goods/services, and landing one of these contracts is a great way to grow your small business. Finding one is the easiest part. The challenge comes with fulfilling and delivering on the contract.

Many times, issues with fulfillment and delivery arise because the business doesn’t have the funding to fulfill the contract. Below, we’ll explain the most common financial issues faced by small businesses and six financial solutions. Ideally, you need to obtain financing before you bid on a government contract.

2 Most Common Financial Challenges

Most small business owners would never fathom that winning a government contract can create financial challenges. This is because even a small contract can be large by small business standards. The financial demands of the contract can drain your resources and unless you’re prepared, you’ll have cash flow problems. The two most common financial challenges faced by small businesses are:

Slow payments equal cash flow issues

Most government entities require net-30 to net-60-day terms. Most small business owners don’t think about this when they bid for large contracts, but slow payments can have a significant impact on your finances.  

You must pay expenses related to fulfillment of the contract and then wait 30 to 60 days or more for payment. This becomes difficult if you don’t have a cash reserve or if you’ve hired additional staff for the project. It may leave you unable to pay your employees or suppliers on time.

No money to pay vendors

Another potential issue is the inability to pay vendors. Most small businesses must pay suppliers when they purchase supplies. If you don’t have the funds to pay vendors, you can’t purchase goods and you may not be able to fulfill the contract.

Get Financing Before Bidding

If you need financing, it’s critical to obtain it before submitting a bid. It can take several weeks to a few months to get government contractor financing. By having financing in place before you submit a bid, you can avoid delivery issues in the future. You want to avoid not having the funds to execute a bid once you win it.

Government Contract Financing Options

Below, we will explore 6 effective options for financing government contracts that are easier to obtain than conventional financing and can be used by small businesses. they are flexible and suited for growing government contractors.

SBA

The SBA, or Small Business Administration, offers several programs to help small to mid-size companies. if you need a small line of financing, up to $50,000, you may want to consider a microloan. These are much easier to qualify for than a traditional bank loan and are ideal for those who are just starting.

Larger businesses may want to consider CAPLines, which are a type of 7(a) loan. They can be structured in several different ways and can go up to $5 million.

It’s important to note that the SBA does not lend the money but provides guarantees to banks that will underwrite the loans.

Invoice Factoring

The primary challenge for most government contractors is cash flow due to slow payments. Invoice factoring can solve this issue by financing your invoices. This means they provide your business with funding while you wait for the government entity to pay.

The qualification criteria aren’t as stringent, and this type of financing is available for small and growing businesses that don’t qualify for traditional financing. It does take a few weeks to set it up, making it an ideal solution for businesses dealing with government contracts.

Accounts Receivable Line of Credit

Accounts receivable line of credit, also known as sales ledger financing, is an alternative for companies that invoice at least $30,000 per month and have a solid track record. It is ideal for businesses that have outgrown invoice factoring but have not graduated to traditional bank financing. The benefits of this type of financing are similar to those of factoring lines and can grow with your business, as long as you have quality receivables.

Purchase Order Financing

This type of financing helps wholesalers with large purchase orders. It can only be used in transactions where a product is sold. It cannot be used to fulfill orders that offer a service.  

Purchase order financing allows you to cover supply costs so the order can be fulfilled, and you can book the revenue. It is flexible and can accommodate growing orders. This solution is ideal for orders with high-profit margins, typically above 20%. Setting this financing up is easy and takes a couple of weeks.

Supplier Financing

Supplier financing can be used by small to mid-size manufacturers and distributors to pay suppliers. This is a type of supply chain financing in which the finance company provides credit to a small business and intermediates supply purchases.

This option works for companies with a strong track record and at least 3 years of operation. One advantage of this type of financing is that it can be combined with other forms of financing. When used properly, it can improve your capability and allow you to fulfill orders or build inventory.

Asset-Based Lending

For larger, more established companies, asset-based lending is an option. This can be structured like term loans or lines of credit, based on the assets being financed- equipment, accounts receivable, or inventory.

Asset-based lending is used by growing companies with established financial controls that are unable to qualify for conventional financing. You need to have at least $1 million in monthly revenue.

Conclusion

There are several factors used to determine the best type of financing: company size, transaction type, and financial situation. If you need to improve cash flow, sales ledger financing or invoice factoring is best. If you need to pay suppliers, you should consider supplier financing or purchase order financing. If your business is larger and has an established track record, an asset-based loan might be best.

If you need help with your government contract financing, contact the professionals at First Class Lending. We can help you evaluate your needs and determine the best option.