Many think only very large companies can do business with the government, which is untrue. Congress sees how important small businesses are to the U.S. economy and has set aside goal measures for each department to purchase goods and services from small businesses and veteran-owned small businesses.
However, being a government contractor as a small business owner requires an enormous amount of work and lots of steps to be successful. We put together an ebook, “The Government Contractor’s Handbook,” in partnership with FedBid, GovTribe and WinBiz Proposals to help you every step of the way. It covers topics such as teaming up, working with a contracting officer, contract financing, proposal basics, bidding for a contract and managing your sales process.
Today, we’re going to go over one of the most important steps in government contracting – government contract financing and how you can mobilize funding alongside your accounts receivables financing. Without small business contract financing, you’ll find it hard to fulfill those government contracts. Some business owners look toward avenues that aren’t sustainable for their business. Traditional bank loans ask for collateral that add a huge personal risk. Credit cards have high rates and the limits are far below what you need to finance a government contract. Giving up equity and ownership can affect your preferred veteran status.
Government Contract Financing Options That Work
When it comes to government contract funding options, a government contractor could look at invoice financing options such as invoice factoring or invoice discounting as well as recourse or non-recourse factoring. One of the main benefits of this contract payment method is that your credit is less of a determining factor in the funding decision because you will most likely have an invoice on hand.
We know the government will pay you, we simply don’t always know when. Similarly, in the case of a subcontractor arrangement, we know that Boeing (for example) will pay you as well. Again, we just don’t know when.
This challenge is why StreetShares has mobilization funding programs that work through the entire lifecycle of the contract while you wait to get paid through the invoice.
First, let’s look at contract ﬁnancing definition and options one by one and then see how mobilization funding works alongside them.
Invoice Factoring or Discounting
This common financing technique is where your invoices to the government (after you have provided your goods or services) are sold to a finance company at a discount with an advance rate. For example, a $100,000 invoice might be sold at a discount of 1% per month with an advance rate of 90% or $90,000 advanced. In the meantime, your business gets the funds you need to pay suppliers, for working capital or to help fund your next project as the money comes in (eventually) from the government. One thing we can be certain of is that the government will pay. When they pay and how that time lag affects your business is the question.
Recourse Factoring vs. Non-Recourse Factoring
As you look for invoicing financing options, you will undoubtedly encounter terms such as “recourse”, “full-recourse”, and “non-recourse” factoring. These are a few of the common terms that are employed by the invoice finance companies. While they sound a lot alike, they create different obligations regarding the invoices that are being financed.
In a recourse, or full recourse, factoring agreement the company financing the invoices does not accept certain risks associated with the accounts. Where this becomes important is if the invoices do not get paid in a timely manner, the finance company can charge the invoices back to the contractor.
In a non-recourse factoring agreement, the company financing the invoice has determined it is willing to take on certain risks with respect to the invoices. If those risks occurred, the invoice financing company may not be able, or may not be likely, to charge back the invoices to the contractor.
Of course, these definitions are just general and the type and terms of any contract will be spelled out in your agreement with the invoice financing company. You should read the fine print and be aware of what you may be agreeing to.
StreetShares’ government contract financing program is non-recourse.
Bidding Takes Time
There may be several months of negotiations once you’ve won the bid, and at this point, you haven’t even started doing any work yet. If your contract provides a down payment, receiving the payment often takes anywhere from 30 to 75 days to come through. In the end, the full payment comes only when the product is completed and received.
Clearly, it takes a long time between being awarded the contract and actually getting paid, so thinking through how you will finance the expenses accrued before winning the bid, better positions you and your business for long-term success.
Learn how to get ready and search for a bid in "The Government Contractor's Handbook."
Best Time to Seek Contract Financing
The best time to seek contract financing is before you even have the contract in hand. Building relationships with financial partners beforehand can make the financing process much easier.
Knowing you have financing in place can help you bid on the project yourself or present your ability to fulfill your part of a contract as a sub to a prime contractor.
The previous financing options we described revolve around factoring, which is the funding of your invoice upfront. At StreetShares, we can actually mobilize your funding, which would include term loans and lines of credit early in the process along with contract financing after you have delivered to the government.
Explore Mobilization Government Contract Financing
To get mobilization funding lined up, here are some things you are going to need:
- Cash Flow: StreetShares normally asks for your last six months of business bank statements to analyze cash flow of your business.
- Personal and Business Tax Returns: We need both since many business owners are in what are known as ‘pass through’ entities like an LLC where your business income passes through to your personal tax return.
- Credit Score: The most popular credit score is your FICO. If you know where your credit is now, then you’ll know whether to work on improving. Click here to learn more about why your score is so important.
- Financial Statements: We may ask for additional documents such as your personal and business bank statements.
Get Mobilization Funding with your Government Contract
We’re happy to come alongside and make the invoice financing process as painless as we possibly can. Our contract financing option paired with mobilization funding might be just thing you need to stay afloat in the midst of the revolving financial doors of government contract financing. As fellow veterans, we know what it means to work hard with a purpose and mission.
Not ready to get contracting financing? We’re here to provide resources every step of the way through evaluating your marketing to creating a proposal and bidding for the contract. Download “The Government Contractor’s Handbook” to get eight chapters full of resources and step-by-step guides.
*This program is not associated with the SBA Patriot Express Loan Program, which was discontinued.
This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.