One of the lesser-known but effective ways to grow your business is by bidding on government contracts. The U.S. federal government is tasked with awarding billions in small business contracts each year to help level the playing field and create more opportunities for SMEs. Finding and bidding government contracts, however, is the easy part. Satisfying the terms of the contract is an important task and mismanagement can be a drain on your finances. Management problems often result from a lack of working capital.
Fortunately, small business owners can apply for government contract funding to help fund the operating costs associated with fulfilling these contracts. Here are five types of loan programs that you can choose from:
1. SBA loan
The Small Business Administration (SBA) offers various loan programs to finance government projects. They took out SBA loans to give SMEs the opportunity to secure financing with bank interest. There are several SBA loan products that you can choose from. However, if you are in need of a small line of funding, then you should apply for SBA microcredit. Microloans have a maximum loan amount of $ 50,000 and are easier to qualify 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 micro-loan to buy inventory and supplies, additional working capital, or equipment. You can't use microloans to buy real estate or pay off existing debts. On the other hand, SBA 7 (a) loans enable business owners to borrow a significant amount of money. You can qualify for up to $ 5 million and use the funds for almost any business purpose, such as: B. to cover business expenses, inventory, working capital and more.
2. Calculation factor
You can fund slow-paying invoices by applying for invoice factoring. Here's how it works: This funding option lets you sell pending government bills for instant funding, so you don't have to wait 30, 60, or 90 days to get paid. Lending companies typically add 80% to 90% of the total invoice value upfront, and you get the remaining percentage after the government pays, less a small transaction fee. The government is a good but slow payer, so the assignments allow business owners to fund government bills. Invoice factoring companies care more about your customers' creditworthiness than yours. Since the government is your customer, you have a higher chance of qualification.
3. Order Financing
Small businesses often work with suppliers who require an initial payment before the goods are shipped. This can be a problem if you don't have enough cash to purchase the products and materials needed to perform the contract. How it works: Order financing gives you the financing you need to pay suppliers for the goods needed to perform a government contract. Lenders typically add 80% to 90% of the total cost of supplies. As soon as production is completed and the goods have been delivered, you can invoice your customer. Your customers then pay the lender. Once the lender is paid, they'll deduct a small transaction fee before sending the rest of the money on your way. Only companies that resell finished goods can qualify for order finance.
4. Inventory financing
Small business owners who need to purchase much-needed inventory can apply for inventory finance. Here's how it works: Lenders quote a percentage of the total value of the inventory you need to buy, and the inventory you purchase acts as collateral for the loan. Business owners who typically use this financing option require large amounts of inventory to fulfill customer orders or a government contract. However, the use of funds is limited to inventory purchases only. You can't use it for working capital needs, payroll, and more.
5. Asset-Based Loans
Asset-based loans allow you to use business items such as inventory, bills, commercial real estate, equipment, marketable securities, and intellectual property to secure a loan. This is a great option for business owners who don't have enough cash flow or credit to qualify for more conventional funding options. The interest rates, terms and loan amounts depend on the value of your assets. There are two ways to structure an asset-based loan: like a classic term loan or a line of credit. If the assets you pledged are appliances, machinery, real estate, and other assets, the loan can be structured like a term loan. On the contrary, the loan works like a line of credit when your assets are inventory and bills.
Fund You Government Contracts with Government Contract Financing
Working with the federal government is a great opportunity for entrepreneurs. However, you need to make sure that you have access to additional working capital when needed. Government contract finance can provide financial assistance to your business if you perform the contract. Make sure you know your options and evaluate your business before applying for a loan.
