One of the lesser-known but effective ways to grow your business is to bid for government contracts. The US federal government is mandated to award billions’ worth of contracts to small businesses annually, leveling the playing field and creating more opportunities for SMEs. However, finding and bidding for government contracts is the easy part. Fulfilling the contract’s terms is a major responsibility, and mismanagements can put a strain on your finances. Management problems often stem from a lack of working capital.
Fortunately, small business owners can apply for government contract financing to fund operational expenses incurred in fulfilling these contracts. Here are five types of loan programs you can choose from:
1. SBA Loans
The Small Business Administration (SBA) offers several loan programs to finance government projects. They created SBA loans to gives SMEs a chance to secure bank-rate financing. There are several SBA loan products you can choose from, but if you need a small line of financing, consider applying for SBA microloans. Microloans have a maximum loan amount of $50,000, and they’re easier to qualify for than regular bank loans. They’re great for small businesses that need a small amount and don’t want to be in debt for long. You can use the funds from a microloan to purchase inventory and supplies, additional working capital, or buy equipment. You can’t use microloans to buy real estate or pay off existing debt. On the other hand, SBA 7(a) loans allow business owners to borrow a substantial amount of money. You can qualify up to $5 million, and you can use the funds for almost any business purpose, such as covering business expenses, inventory, working capital, and more.
2. Invoice Factoring
You can finance slow-paying invoices by applying for invoice factoring. Here’s how it works: This financing option allows you to sell pending government invoices in exchange for immediate funding, so you don’t have to wait for 30, 60, or 90 days to get paid. Lending companies typically advance 80% to 90% of the total invoice value upfront, and you’ll receive the remaining percentage once the government pays, minus a small transaction fee. The government is a good but a slow payer, so the assignment claims acts enables business owners to finance government invoices. Invoice factoring companies are more concerned with your customers’ creditworthiness instead of yours. Given that the government is your customer, you’ll have a higher chance of qualifying.
3. Purchase Order Financing
Small businesses often work with suppliers who demand initial payment before shipping the goods. This can be a problem if you don’t have enough cash on hand to purchase the products and materials needed to complete the contract. Here’s how it works: Purchase order financing gives you the funding you need to pay suppliers for the goods needed to fulfill a government contract. Lenders typically advance 80% to 90% of the total cost of the supplies. Once the production is complete and goods have been delivered, you can invoice your customer. Your customers will then pay the lender. Once the lender is paid, they deduct a small transaction fee before sending the rest of the money your way. However, only companies that resell finished goods can qualify for purchase order financing.
4. Inventory Financing
Small business owners who need to buy much-needed inventory can apply for inventory financing. Here’s how it works: Lenders provide a percentage of the total value of the inventory you need to purchase and the inventory you bought serves as collateral for the loan. Business owners who commonly use this financing option need large quantities of inventory to fulfill customer orders or a government contract. However, the use of funds is only limited to inventory purchases. You won’t be able to use it for working capital needs, payroll, and more.
5. Asset-Based Loans
Asset-based loans let you leverage business assets, such as inventory, invoices, commercial real estate, equipment, marketable securities, and intellectual property to secure a loan. It’s a great option for business owners who don’t have enough cash flow or credit to qualify for more conventional funding options. The rates, terms, and loan amount depend on the value of your assets. There are two ways to structure an asset-based loan: like a classic term loan or a business line of credit. If the assets you pledge are equipment, machinery, real estate, and other assets, the loan can be structured like a term loan. On the contrary, the loan functions like a line of credit if your assets are inventory and invoices.
Fund You Government Contracts with Government Contract Financing
Working with the federal government is a huge opportunity for business owners. However, you’ll need to ensure that you have access to additional working capital when you need it. Government contract financing can offer your company financial support as you’re fulfilling the contract. Be sure to know your options and assess your business before you apply for a loan.