Securing government contracts can be a good opportunity to grow your small business. Agencies at all levels of governance, from the federal to the city level, are in need of various kinds of goods and services. Plus, they tend to buy in bulk.
Many smaller companies erroneously believe that the hardest part of government contracting is finding and securing a good contract. The truth, however, is that the order fulfillment and delivery processes tend to cause more issues than these companies may be expecting.
Many of the issues stem from the fact that small contractors lack the cash flow they need to fulfill the order, and this shortfall sets them up for failure. There are two main reasons why a small contractor is likely to experience cash flow problems in government contracting:
- Slow payments. Governments, much like big corporations, will take a while to pay their suppliers. On average, the majority of government agencies pay their invoices in net-30 to 60 days. This means the contractor must be able to cover the expenses associated with filling the order for up to two months after delivery.
- Prepaying suppliers. Some businesses may need to buy bulk orders from vendors that require advance payment. In this case, the small contractor may not have enough money to make the purchase and thus fulfill the government contract.
For this reason, small contractors should have access to reliable sources of financing before they even consider bidding on a government contract. This is where good credit comes in. When a company has a good credit score, it can secure better financing arrangements that offer lower interest rates and more business-friendly terms, such as micro-loans, premium business lines of credit, and supplier financing.
Without a good business credit history, small contractors will have to turn to more expensive financing arrangements, such as invoice factoring and purchase order financing. While the business may technically secure the funding it needs, the cost of this money may make government contracting less attractive, even prohibitive.
In short, before a small company starts bidding on government contracts, it truly pays to get its business credit score in order.