.Winning a government contract can be very beneficial for small and medium-sized businesses – these contracts typically mean a steady stream of work and revenue, not to mention a boost to the Company’s reputation – after all, if the US government – the biggest client in the world – trusts your business to deliver, that goes a long way.
However, the dirty little secret is that government contracts come with a financial difficulty that most people don’t anticipate. It is particularly challenging for small business owners – the Government doesn’t front money and only pays after delivery (and who knows how fast they will pay.)
In short, government contracts can be a working capital nightmare.
It’s important that a business owner take a few things into account before deciding how to handle any potential working capital shortfalls.
1) When can the first invoice be submitted, and what are the expected payment terms?
2) Can the business keep the doors open and the roster paid until the government processes that first payment
3) Is that first payment actually enough to make a difference, or is it just kicking the can down the road?
Suppose there are doubts about whether a single receivable can bridge the working capital gap. In that case, factoring may not be a good option.
However, in most cases, a government contract loan or line of credit is a better fit, which is a lump sum of funds upfront that can be used at the Company’s discretion, or a similar-sized revolving credit line that can be used at any time as needed.
Types of government contract financing: Factoring, Loans, Lines of Credit
Factoring government receivables: Allows a business to sell their submitted but yet unpaid government contract invoice to a financing partner. This type of financing is beneficial if a small business needs a one-time or short-term solution to a cash flow challenge to continue operations.
Government Contract Loan: A business receives a portion of its current contract upfront, which is paid back over time with interest
Government Contract Line of Credit: Similar to a credit card, it gives a business the flexibility to borrow up to a certain amount of working capital at any time, based on the remaining value of its government contracts.
What is a Government Contract Financing Company?
Government Contract Financing Companies specialize in supporting companies in the government space. Traditional banks typically don’t finance government contracts due to the cancellation risk, which is why these specialized financing companies exist. They are better suited to helping government contractors get the funding they need for their businesses.
Not all government contract financing companies are the same, however. They each offer different programs that have been created to help clients in unique ways. One such Company is LEONID, a government contract financing company that provides various flexible financing options for different situations a contractor might experience. LEONID offers a full suite of products – term loans, lines of credit, invoice factoring & SBIR grant financing. Most importantly, LEONID does not require any personal guarantees. Their services have been created to help government contractors at any phase of their government contract – before start or mid-stream. Additionally, they are DoD Trusted Capital Provider, a designation that only two non-dilutive financing companies have ever achieved.
Conclusion: How to manage government receivables and your business plan.
Government contract financing can be an extremely beneficial source of funding for businesses. Companies can create a solid business plan that takes advantage of these opportunities by understanding the various needs of your business and how each financing solution can help.
First and foremost, a government contractor needs to figure out its operations and revenue cycle. This means having a solid understanding of their goals and needs and being able to meet the expectations to fulfill their government contract.
The next key thing to consider when applying for a government contract financing is your Company’s financial stability. Strong credit ratings and a sound financial structure will help you secure the best terms from your government financing partner. In addition, demonstrating a track record of successful contract execution can also improve your chances of getting financing from your partners.