There is growing gravitation of commercial businesses engaging in government contracting these days. As they seek contract vehicles to help with access to opportunity, the question of their ultimate success usually comes into play. To be successful requires access to cash flow to keep your profit ahead of your expenses.
The common challenge of the burgeoning GovCon is access to affordable and flexible working capital. Truth be told, it is an issue small businesses in all industries share. But for GovCons, with the need to thrive to bid another day, this is the most pertinent issue they will face. Here are a few familiar indications that you may be in need of alternative financing:
- Your bank can’t lend to you.
- You are looking to bid on bigger contracts.
- You are reinventing your existing GovCon business.
Traditional Financing
In a perfect world, you could just walk into the local branch of your bank and request a reasonable amount of working capital in the form of a line of credit. But these days, you’d be more able to rub a lamp and ask the little genie that pops out to grant you this as one of your 3 wishes than you’d be likely to actually get upfront cash from a traditional lender!
Banks are restricted by financial covenants and federal regulations that inhibit lending to businesses for a number of reasons. Being rejected for a line of credit with your bank is more than likely right now, and the reasons can stem from: Lack of past performance history, lack of audited financials proving at least 24 months of positive performance, or even just because your industry provides a risk that the bank is not willing to insure.
It is a tough lot because while a bank presents the most cost-effective access to capital, it is the most difficult to obtain. But you don’t have to worry, there are plenty of resources that can provide you with the access that a bank cannot. Your best bet is to be informed of your options and know how much is reasonable for you to pay for the cash that you borrow.
Bigger and Better is on the Horizon
As you acquire the oh-so-important past performance history, and you start to make a positive name for yourself within your industry, you will start to see new and bigger opportunities that attract your attention. While on one hand, the ability to gain bigger contracts is an obvious sign of success; on the other, it provides yet another roadblock in the path to traditional financing.
In the finance industry, progressive or “hockey-stick” growth is not attractive to traditional lending environments. It is an additional risk that most banks are not able to stand behind, posing, yet again, alternative financing as your only option. But not to be discouraged. Options such as asset-based lending, factoring, merchant cash advances, and taking on equity partners is still available to you. Here is where knowing the difference to make an educated decision of what is the best choice is key.
Sell, Reinvent, or Fade Away
Not to sound too biblical, but there is a time for everything. A time to grow. A time to change. And there is even a time to sell or step away. Every government contractor goes through a journey that eventually brings them to this point. So when your business approaches the end of its lifecycle, what do you foresee for your future?
It is very common for businesses to merge or become acquired by larger, prime contractors that may have provided opportunities to partner with them on prior contract work. Wouldn’t you rather sell your hard-earned, successful business for top dollar rather than fade into a decline because you stayed too long?
Another avenue for some industries – like technology and cybersecurity, for example – could be to reinvent your offering to keep up with the changing environment and needs of the world around you. If you choose to start again, you wind up back to square one with lending options, regardless of the past performance history your once-successful endeavor may have procured.
Traditional financing is going to once again require you to check necessary boxes such as proof of past performance history, positive financials, and risk-free industry opportunity in order to qualify no matter how long you were in business with your last company.
Moral of the Story
Alternative financing is a viable option that can give you access to working capital to satisfy your contract expenses and allow you to concentrate on why you started your business. If you join industry-specific and GovCon-focused organizations, you will no doubt learn quickly that all businesses have been where you are. This type of peer interaction will provide a wealth of resources that can better inform you on where the best alternative options lie for your specific needs.
Your best bet? Engage early and often with whatever lending option you choose.
Knowing the amount of cash you will have access to is much more effective in your process before you win an award than it is afterward. Just know that you are not alone, and there is an option best suited for your business needs. These days, you are part of the majority if you are seeking a loan to fund your work, so ask around. Your best asset is your network to find the options available to you today!