For a small business, finding a government contract is a great way to grow. But, for a few business owners, the government contract is a problem. Due to a government contract, business owners usually experience financial problems and have to look for funding options. The financial demand of the contract drains the entire resources of the business, making its fulfillment and delivery difficult. 

Two common financial problems of government contracts 

Cashflow suffers due to slow payments 

Usually, government agencies pay their invoices in the next 30 to 60 days. Many business owner stake this delay into account to win the contract, forgetting the future consequences. This impacts the cash flow, causing serious financial problems. 

Waiting for 4 to 8weeks for payment is not a big deal if you are capable of paying the expenses associated with a government contract. But, if you have hired additional staff to complete the project, payment would be difficult if you don’t have a cash reserve. Your employees will be left unpaid and delivery of the project will be delayed or incomplete. 

Don’t have enough money to pay the vendors 

To complete the government contract, you will have to prepay the resellers and wholesalers for the products. You cannot expect them to deliver the materials in bulk on credit as it will be risky for them. 

Due to the high financial demand of the government contract, you may not be able to afford to pay your vendors. And if you don’t pay them, you won’t be able to purchase goods or necessary materials. And thus, you may not be able to fulfill the government order. 

What’s the solution? 

Look for a reputable lender and get financing for government contracts, unhesitatingly. 

Is it possible to get financing before bidding?

We know you don’t want to get stuck in a situation where you have won a bid but don’t have the funding to execute it. So, it’s better to get it before you submit your bid. Another reason to get financing before bidding is that government contract financing takes anywhere from a few weeks to a few months. With this, you will have all your resources in place and avoid potential delivery problems later on. 

There is also a logistical advantage of getting funding before bidding. Many government contract finance solutions rely on the assignment of claims act for payments. Also, when you first submit a bid, it’s relatively simpler than submitting it later. The process becomes time-consuming and everything depends on a specific contracting officer. 

What are the options to get financing for a government contract?

The Small Business Administration (SBA)

With its several programs, the Small Business Administration helps small and midsize companies. The choice depends on your requirements or bidding requirements. 

If you need a very small line of financing, you should consider Microloans. The maximum limit of this line reaches $50,000, though it varies by state. Most importantly, it’s easier to get Microloans than regular bank loans. 

If your business is large, you should consider CAP Lines. CAP Lines are a special type of 7(a) loan, which ranges up to five million dollars. The best thing is that you can structure this line in many ways. It’s an ideal option for startup entrepreneurs. 

Here, you need to understand that SBA doesn’t lend money directly; instead, it provides guarantees to banks that underwrite the loans. 

Invoice financing (factoring)

Slow invoice payments from government contractors lead to cash flow problems. And when the cash flow of the company gets disturbed, other things don’t work as expected. Invoice financing or factoring is the solution for this. 

Specializing in government receivables, the invoice factoring program solves the cash flow problem by financing the invoices. It provides funds to run the business and complete the government project while you wait for the payment from the government.  

Compared to financing options, qualifying for invoice factoring is easy. This is an ideal option for small and growing businesses that don’t meet conventional banking requirements. 

Accounts receivable line of credit 

If you have an invoice of a minimum of $300,000/month with a track record, the line of credit is a great alternative for you. Other than this, this is an ideal option if you have outgrown factoring but are not ready for bank financing. 

The accounts receivable line of credit offers benefits similar to factoring lines. This option can help you grow your business with sales as long as you have quality accounts receivables. 

Purchase order financing

This applies only to product wholesalers who have large purchase orders. You can utilize purchase order financing in transactions in which your company sells a product. This financing program will cover your costs associated with a specific government purchase order. 

With purchase order funding, you can fulfill the order and book the revenue. Most importantly, the PO financing is flexible, accommodating growing orders easily. 

Wholesalers with higher profit margins enjoy this line as setting it up is relatively easy and takes only a couple of weeks. 

Supplier financing

As a form of supply chain financing, supplier financing helps manufacturing companies that need funds to pay suppliers. This is an ideal option for companies that have established a track record and have at least three years of operations history. 

In this line of financing, the finance company will provide credit to your company and intermediates your supplier purchases. The best thing about supplier financing is that it works well with existing financing. 

Asset-based lending 

For larger and most established companies, asset-based lending is one of the best financing alternatives. Based on the underlying asset that is financed, asset-based financing can be structured to resemble lines of creditor or term loans. With this, you can finance your company’s main assets, which include accounts receivable, inventory, and equipment. 

If your company is generating a minimum of $1,000,000 monthly revenue but doesn’t qualify for a conventional line of credit, apply for asset-based lending. With this, you will deliver government contracts successfully. 

A government contract is a building block for your company. So, you shouldn’t let it go due to a lack of funding. With the help of experts, you should choose the right financing option and complete the given contract.