Few business owners ever think that obtaining a government contract can also result in financial difficulties. This is because, by small business standards, even little government contracts can be substantial. However, the contract’s financial requirements could deplete your funds. Therefore, you may run into cash flow issues if you don’t plan for these demands.
Here are some of the best financing options available for businesses that work with government contracts:
The Small Business Administration
Numerous initiatives run by the Small Business Administration are aimed at supporting small and midsize businesses. Businesses that require a minimal line of credit might think about microloans. These lines have a $50,000 cap, though state-specific restrictions apply. They are perfect for beginning entrepreneurs because they are somewhat easier to obtain than conventional bank loans.
Larger companies should consider CAPlines, a kind of 7(a) loan. CAPlines come in various forms and have a maximum value of $5 million. Remember, the SBA does not make direct loans. Instead, it offers assurances to financial institutions who are eager to underwrite loans.
Invoice Financing
Most government contractors need help with cash flow due to late invoice payments. This issue is resolved by financing your bills through a government receivables-focused invoice factoring program. While you wait for payment, you can operate the business with the help of this service. Government contract factoring is a fairly common solution to cash flow problems.
Furthermore, it’s easy to qualify for factoring. Small and expanding firms that don’t fit the restrictions of traditional banking can use factoring lines. Setting this up takes only a week or two. Therefore, factoring is an excellent choice for government contractors.
Line of credit for unpaid invoices (sales ledger financing)
A sales ledger financing system functions similarly to a line of credit backed by accounts receivable. For businesses with a track record and monthly invoices of at least $300,000, it’s a fantastic solution. In addition, companies that have outgrown factoring but have yet to be ready for bank financing may opt for this solution. As long as you have good accounts receivable, sales ledger finance lines can expand with your sales and offer advantages similar to factoring lines.
Purchase Order Financing
Large purchase orders are beneficial to product distributors that use purchase order financing. However, it can only be done in transactions where your business sells a product. Orders for services must be filled with something other than PO financing.
However, you can pay the supplier costs related to a specific government purchase order via PO financing solutions. In addition, you can complete the order and record the income thanks to this financing. The line is adaptable and made to handle increasing demands.
This technique works well for orders with higher profit margins—typically above 20%. Furthermore, a line of this kind may be set up relatively quickly in one or two weeks.
Supplier Financing
When small and midsize manufacturers and distributors receive government purchase orders and need to pay their suppliers, supplier financing might help. In this type of supply chain financing, your business accepts credit from the finance company, which also handles the middleman role in your supplier transactions.
Companies with a proven track record and at least three years of operational history can use this service. The fact that supplier financing integrates nicely with your current funding is a significant benefit. When used properly, it can increase your capacity, enable you to complete more orders, or help you improve your inventory.
Asset-Based Lending
This type of loan should only be considered an alternative for larger, more established businesses requiring financing. Depending on the underlying asset that is financed, asset-based financing lines can be set up to resemble lines of credit or term loans. These lines allow you to fund your business’s key assets, including inventory, equipment, and accounts receivable.
Growing businesses that have developed financial controls but are ineligible for a traditional line of credit use asset-based loans. Companies with minimum monthly revenues of $1,000,000 are eligible for this service.
Summary
The kind of funding you receive is based on your financial status, the sort of transaction, and the size of your business. Consider sales ledger finance and invoice factoring if your business needs to increase cash flow. Companies that want funding for supplier payments should consider supplier and purchase order financing. However, larger businesses with proven track records may consider an asset-based loan. These options for loans for government contractors give every business the chance to complete their bid and fulfill their contracts successfully.
