Bidding on a Government Contract? Show Them The Money

/ / Published in Creative Capital Associates, Gary Honig
A common complaint small businesses make is that government agencies stick to bigger vendors and don’t try out new smaller companies. (It cropped up again this week, during a Maryland small business forum featuring both of the state’s U.S. senators and Bridget Bean of the SBA.)
The reason for this is contract officers (COs) don’t like problems. If a contract gets awarded to a small vendor who proceeds to mess up the work, it means a headache and more work for the CO. It’s really that simple. This is why people who teach businesses how to sell to the government stress the fundamental of building relationships. If the CO feels they know you and can trust you and can see a history of performance, they know a contract award won’t come back to haunt them later. Many small companies think if they land a large government contract, it’s like money in the bank and the bank should lend them some money. Unfortunately, it does not work this way, especially when a business does not have an established track record. 

If a small business bids on a contract (which they have not been awarded yet) and they try to secure “mobilization” capital — money needed up front to get a contract started — the chances of securing funds will be near impossible. In other words, the small business is underfunded to the extent that they cannot purchase materials or hire enough people to work on the contract in order to get it started. 

When an agency is considering all the solicitations for bid on a particular contract, one definite item they’ll have a sharp eye on is the financial condition of the small business. Your balance sheet will tell them whether you can perform on the contract. They want to see you have already secured the necessary funding ahead of time for the contract you are bidding on. 

If a company is looking to secure bank financing, they need to show historical profit and income to qualify for a loan. If the loan needed to support a possible contract is much larger than the company’s historical financial statements – the outlook is not so good. Yes, banks will lend on government contracts… to well-established performers who are already working on multiple contracts, with significant assets built up and a strong balance sheet. 

One capital solution may be receivables financing from a factoring company. Because the decision to fund is based on the credit of the customer (the U.S. government), this essentially gives the borrower an unlimited supply of capital – provided they can perform to the point of invoicing a customer. Unfortunately invoice factoring will not provide mobilization, or up-front capital, to get the contract started. But a factoring company may provide a letter of approval to be included in a solicitation bid for the purposes of showing the financial wherewithal to do the scheduled work. 

In all aspects of dealing with commercial finance, it is the role of the business owner to know how the process works. Knowing exactly what company assets have been pledged as collateral is key and critical in terms of securing outside working capital for growth. 

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