Navigating the government contracting industry presents unique challenges, with additional hurdles specifically impacting small businesses with limited past performance. While winning a contract is a significant milestone, it doesn’t automatically translate to access to capital. Understanding what financing options you qualify for at each stage of growth is crucial for small government contractors. Many GovCons discover that mapping out their plan for funding access is just as critical as capturing new business opportunities.
The Government Payment Timeline Gap
The one thing you can rely on is that the federal government will pay you for the work you perform or the goods you supply. But it’s the issue of timeliness of payment that usually causes the most concern. The normal ebb and flow of contract payments, coupled with the stops and starts on contract work that prevails in this industry, can burden your monetary responsibility concerning your payroll and employee liabilities. That means you can find yourself in trouble, fast. It’s better to have a plan before the contract is executed.
Limited Traditional Banking Options
What happens to many small businesses when they go to a bank for funding? They’re denied. Whether they don’t have the past performance or the credit to vouch for a loan, traditional lending options are few and far between. Banks often:
- Require 2-3 years of profitable operating history
- Look for significant collateral beyond the contract itself
- Have strict credit score requirements
- Impose restrictive covenants that can limit business flexibility
- Take weeks or months to process applications
This leaves many viable businesses searching for alternative funding sources.
Solutions for Small Contractors
While there are many challenges, government contractors can employ several strategies to make sure they are ready for the contract win-and funding it.
- Plan Ahead: Make sure you have done your research and know your funding options. Have a detailed plan on cash flow projections and how you plan to fund them for the duration of the project.
- Explore Alternative Financing: Consider options like revolving lines of credit, like those offered by Parabilis. You can also look into SBA loan programs designed for government contractors.
- Build Financial Reserves: When possible, maintain cash reserves to handle timing gaps and unexpected expenses.
- Consider Strategic Partnerships: Team with larger prime contractors or establish mentor-protégé relationships that can provide access to additional opportunities and resources for your business
Understanding these funding challenges is the first step toward addressing them. Small government contractors should make sure they stay informed about available resources and understand the full scope of their funding challenges before applying for a contract.
If you are a business owner looking for advice on how to build your funding plan, please reach out to us.