While being awarded a government contract is a huge step towards growth for many small businesses, it’s important to remember that fulfilling it takes a lot of work, as well as a significant amount of working capital.
Small businesses often struggle to get the job done – not because they’re not willing to put in the work, but mainly because they lack the funding to fulfill these contracts.
In this article, we’ll discuss four types of government funding solutions for your business.
1. Invoice Financing
Small businesses love working for the government because they’re an excellent payer. However, they typically pay after 30 days after the service has been rendered. When your capital is tied up in pending invoices, this can put a dent in your cash flow.
Invoice financing is a financing option that allows you to sell your pending invoices in exchange for upfront funding. Once approved, the lender will advance a percentage of the total value of your invoices, usually around 80% to 90%. You’ll receive the remaining portion, minus a small fee, once the government pays their dues. Invoice financing is an excellent option if you need immediate funding and you have pending government invoices to sell.
2. Asset-Based Loans
You can apply for an asset-based loan if your company owns valuable assets, such as inventory, invoices, equipment and machinery, and commercial property. These assets are used as collateral to secure the loan, and the terms, interest rate, loan amount, and loan structure primarily depend on the type of collateral. You can use the funds for almost any business purposes, operational expenses, utilities, payroll, and more.
3. Unbilled Revenue Line of Credit
When working on a new project, you may need to purchase additional inventory, materials, equipment and pay for labor costs. Unfortunately, you can’t immediately bill the government for these expenses. If you’re strapped for cash, you can use your unbilled receivables to receive extra capital. Unbilled receivables are the products or services that have already been delivered but haven’t been invoiced yet.
4. Mobilization Funding
When awarded with a new contract, the government typically requires small businesses to have upfront capital. Government contracts usually have a mobilization funding component, but many businesses prefer mobilization funding programs to obtain working capital. You don’t have to turn down an opportunity to grow your business. Mobilization funding gives you the means to perform on newly awarded contracts.
What Lenders Need From You
Loan requirements typically vary depending on the lender you’re working with and the type of loan you’re applying for. But here are some of the factors lenders generally look for in a loan application:
• Business and/or personal tax returns
• Personal and/or business credit score
• Financial statements
• Cash flow
• Time in business
• The creditworthiness of your customers
Final Thoughts: When is the best time to apply for government contract financing?
The best time to apply for government funding solutions is even before you’ve won a contract. Many business owners make the mistake of applying once they’ve been awarded a contract. However, building strong relationships with top government finance companies can make the entire application process more manageable. Having the necessary funds in place puts you in a better position to bid on a project or present your ability to fulfill your part as a subcontractor.