How Small Businesses Can Secure Big Government Contracts
According to the latest data from Bloomberg Government, federal contract spending hit a high of $562 billion in 2018—up more than a billion from 2014.
Even better news for small businesses: a record-breaking $120 billion of those contracts were awarded to small businesses.
Government contracts represent a big opportunity for small businesses, because they have an advantage over larger firms thanks to the small-business quotas governments need to fill.
Small businesses that meet specific criteria have an even greater advantage when it comes to winning valuable government contracts. These criteria include being at least 51% owned by women, individuals who are both socially and economically disadvantaged, or service-disabled veterans, or meeting the criteria for the HUBZone program.
However, small businesses also face unique challenges when applying for and fulfilling government contracts. In this article, we’ll look at two of the top challenges and examine ways to address them.
Whether a small business wants to be considered as a primary contractor or a subcontractor, its credibility is a key criterion. Unfortunately, smaller, newer businesses tend to be more volatile and have less of a track record, which makes it hard to compete with the credibility and reputation of older, more established businesses.
However, a business can elevate its creditworthiness in the eyes of both the government or a primary government contractor by partnering with a company that offers accounts receivable financing. Also known as an invoice factoring company, this type of financing partner turns outstanding invoices into working capital, which can help a small business demonstrate the financial strength and resilience that primary contractors and government agencies are looking for.
At AR Funding, we often provide our clients with a letter of commitment to accompany their bids on certain contracts from the government. This letter provides assurance to the government or the prime contractor that the small business has a reputable and experienced factoring company on board to support the business’s financial obligations.
When a small business wins a new government contract, it can trigger the need for significantly higher cash reserves in order to scale up product or service delivery.
But banks don’t look at how quickly a business is growing when making their lending decisions, which can make it difficult for businesses to finance this kind of growth spurt through a traditional bank loan.
It’s a frustrating situation, because the government contract represents guaranteed return, but without working capital, the small business can’t deliver on that contract.
To support the first government contract, a small business owner may need to resort to using a credit card to supplement cash flow, but as subsequent contracts increase in value, this solution becomes less and less workable.
This is also an area where an accounts receivable lender can make a difference. This type of alternative lending company can bridge the gap between using a credit card and qualifying for a bank loan because it evaluates the small business based on the value of its receivables rather than its credit score.
A good factoring company will also be able to find creative, flexible solutions to specific cash-flow issues that the government contract may create. For example, in cases where a service company invoices for its services at month end, but issues payroll mid-month, a factoring company can fund the mid-month payroll as soon as month-to-date services are rendered. This kind of flexibility can be the key to helping a small business deliver on the contract smoothly and establish a reputation for consistency and reliability that, in turn, will open the door to more contracts in the future.
How to choose a factoring partner
If your small business has plans to secure government contracts with the support of a factoring company, look for a partner that offers these advantages:
Flexible contract. Whether you decide to use factoring on a regular basis or on an as-needed basis, avoid contracts that lock you in for a year or more or those that still charge you a minimum monthly fee for months when you don’t use factoring services.
Letter of commitment. If you need to boost your credit-worthiness in the eyes of the government or a large primary contractor, find a factoring company that will be willing to issue a letter of commitment that proves you have an adequate financial partner to support your cash flow needs.
Government experience. Small businesses that contract with the government have unique needs when it comes to cash flow, processes, and paperwork. Look for a factoring company that has extensive experience in this space, because they are more likely to understand how the process works and know how to support your success.
Explore New Opportunities
Building a reputation as a valued service partner to the government can open the door to incredible opportunities for your small business, but first, you need to prove that you are financially sound. If your small business has hesitated to apply for valuable government contracts in the past due to credit or cash-flow issues, invoice factoring could be the solution you need.