The federal government wants to do business with small businesses and prioritizes contracts to these types of entities. In Fiscal Year 2021 alone, the government awarded about 26% or $154.2 billion in federal contract dollars to small businesses.
These vast sums will go for a wide array of goods and services at the federal, state, and local level, including municipalities and government agencies. Despite the sheer size and breadth of spending, many of the 33 million small businesses in the United States are unable to participate in the opportunities. There are a number of challenges to being a government supplier and vendor that small business owners need to understand and overcome.
In this article, we’ll cover what financial business brokers need to know to help their clients with getting fast funding for government contracts.
Challenges of Being a Government Contractor/ Vendor
- Sufficient Working Capital: Having sufficient working capital and funding sources is always a challenge for small businesses. Banks are tightening credit requirements for loans and reducing the amount of capital they allocate to higher credit-risk customers. When government contract opportunities arise, obtaining the additional working capital required can be a significant challenge for many small businesses.
- Incur Costs Upfront: Unless a contractor is able to obtain sufficient advance or interim payments terms, the contractor will have to fund the upfront and ongoing costs of a government contract. Funding these costs can be a challenge when working capital funding is difficult to obtain.
- Minimum Capital Requirements: Government contracts have varying capital requirements to ensure that contractors have the financial resources to perform on a contract. It’s important to have funding facilities in place when bidding. It can give a contractor an edge in competing with under-capitalized bidders. It also enables a contractor to take advantage of unexpected supply requests for good, services, and construction projects due to an emergency or natural disaster, such as the recent devastating wildfire on Maui and Hurricane Ian that ravaged Florida in 2022.
- Higher Levels of Inventory or Demand for Services: Because of the uncertain timing and quick response required to win government contracts or fulfil unexpected supply requests, bidders may need to carry higher levels of inventory and supplies or have additional staffing to provide services rapidly. Bidders need contract funding to provide the additional working capital required to carry these costs.
- Making Payroll and Paying Vendors or Suppliers: Government contracts can have long payment cycles. Clients need to make payroll and pay vendors or suppliers now, but they may not be paid for 60+ days or more. This mismatch of cash flows can create a real cash crunch for small businesses that don’t have the working capital to float contract/ project costs. A working capital shortfall can be particularly acute if there is an emergency or disaster that the government needs goods or services for immediately. Where does the capital come from when they are in a pinch?
- Avoiding Defaults on Government Contracts: Insufficient working capital can force a contractor to default on a government contract which could spell the end of their status as a qualified vendor.
- Strategy to Fund Government Contracts: Small businesses need a strategy to fund government contracts that are not a burden for them to obtain, keep open, and increase as their volume goes up and down with contract awards. They need funding to be flexible, easy to use, and responsive when they need it, with the ability to ramp it up for unexpected contract opportunities.
In these situations, the ideal solution for small business owners is invoice factoring.
Government Contract Funding
Funding a government contract with an invoice factoring facility provides the working capital a contractor or supplier/vendor needs to pay employees, vendors, or suppliers. The business sells unpaid government invoices to a factoring company for cash, so they do not have to wait 60 days or more to be paid.
How Government Contract Funding Works with Capstone
Invoice factoring with Capstone is a simple process. A factoring facility provides immediate access to cash flow once approved. After approval, the contractor or supplier/vendor follows these general steps:
- The client submits contract invoices for completed goods or services to Capstone for funding.
- Capstone factors the invoices and pays the contractor a cash advance against the value of the invoices.
- The government agency or municipality, pays Capstone directly when the invoice is due.
- Capstone pays the balance of the invoice less any advance amount and factoring costs to the client.
Invoice factoring can often times be combined with a purchase order (PO) financing facility depending the needs of the client.
Benefits of Government Contract Funding
Funding government contracts with invoice factoring accelerates cash flow to pay employees, vendors, and suppliers, and provides the working capital resources needed to be a qualified bidder and win competitive contracts
Invoice Factoring is an Ideal Solution for Funding Government Contract
Invoice factoring is an ideal solution as a factoring facility can be approved faster and easier than a loan and is also flexible and easy to use. Funds are available quickly, and the size of the facility can be scaled to meet contract requirements. Factoring can be provided for a single invoice/ progress payment or as a program for all accounts receivable. It provides sufficient access to funding for the client at all points in the lifecycle of the contract. Approval for funding is based on the financial strength of the client’s customer instead of the client’s credit profile. Invoice factoring can also be a more convenient alternative to other types of third-party funding sources.
Obtain Fast Funding for Government Contracts through Capstone
Brokers and their clients should work with a factoring company that has extensive experience funding government contracts, and understands how to navigate the ins and outs of the government/agency pay cycle. Most accounts receivable factoring companies lack knowledge about the assignment of financial rights for government contracts and many may not be familiar with the recourse process in the event that there is an issue with payment.
Capstone can resolve cash flow problems related to government contracts and enable clients to offer generous payment terms to federal, state, and municipal governments and agencies. Capstone also has the ability to provide mobilization funding and bid support letters to strengthen the client’s position when bidding on new contracts.
If you have a contractor or supplier/vendor client that needs fast funding for government contracts or cash flow for operations, Capstone can help them quickly obtain the additional working capital they need.
