Government Contractor Financing

Get access to revolving funds when you need it most

Dane Panes

September 12, 2021

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Government Contractors

Financing for Government Contractors

The federal government awards about 23% of all government contract to small business owners. On an annual basis, the federal government commits approximately $500 billion in government contracts for research and development, as well as goods, and services. This means that around $115 billion of government contracts are awarded annually to small business owners.

SMB Compass can provide government contract financing for federal, state, and local government contracts. Our programs are also designed for both prime contractors and sub-contractors. It’s also always best you work with a company that understands the federal assignment regarding the claims process!
Government contracts come with a varying degree of capital needs. Small businesses incur both upfront and ongoing expenses that can be financed through government contract financing programs.

What this means is, a government contractor loan can be structured in many ways, but as always, the details are important, so be make sure they support all of your financing needs.

At SMB Compass we specialize in government contract financing and have the ability to provide support to different contract types. We also can provide mobilization funding, support letters to help strengthen bids for new contracts, and can provide government contract funding for earned but unbilled invoices.

Multi-year government contracts enable small businesses to accurately project future revenues. With accurate projections and budgets, you as a small business owner have the option of securing government contract financing through a variety of structures.

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Loans for Government Contractors

Loans for Government Contractors

Asset-Based Loans

You can use your assets (equipment, accounts receivables, commercial properties, etc.) to secure government contract financing. Asset-based loans use company assets to secure a revolving line of credit or a business term loan.

Service-based contractors that do not use equipment or inventory can use accounts receivables as collateral. For contractors that do have machinery and equipment, inventory, and receivables, an asset-based loan is a perfect solution. Below are some of the ways to use a government contractor asset-based loan.

  • Purchase inventory
  • Refinance equipment
  • Hire new employees
  • Accelerate payment on invoices
  • Increase the operating cash flow
  • New contract bidding

Invoice Factoring

Government contract factoring is one of the most common forms of financing for government contractors. Federal and state government contracts commonly pay on net 30-day terms. This means that many contractors have cash tied up in receivables.
In addition to the receivables, there’s often a component of earned but unbilled invoices. Factoring for government contracts allows for invoices and earned but unbilled invoices to get paid as the work is completed, rather than waiting 30-60 days for payment.
Below are some of the ways that you can use factoring.

  • Purchase inventory
  • Payroll
  • Accelerate payment on invoices
  • Increase the operating cash flow
  • New contract bidding
  • Hire new employees

Earned but Unbilled Factoring

When work is in progress there are some expenses incurred that cannot be immediately billed. Among these are – inventory, materials, equipment, and labor. Factoring doesn’t always provide the liquidity and ongoing cash flow that’s needed.

So, when this is the case, we can look at earned but unbilled invoices to provide additional operating cash flow. By using earned but unbilled factoring, you can unlock cash flow that is trapped in both invoices as well as work in progress.
Below are some of the ways to use earned but unbilled factoring for government contracts.

  • Increase the operating cash flow
  • Hire new employees
  • Purchase materials
  • Unlock cash
  • Increase the operating cash flow
  • New contract bidding

SBA Loans

The SBA 7(a) program is the most common SBA loan program for government contractors. SBA loans amortize anywhere from 10 years to 25 years, depending on what type of collateral is available. For example, the term for government loans using machinery and equipment, inventory, and accounts receivables as collateral is 10 years.

When a government contractor uses commercial real estate as collateral, the term can stretch out to 25 years. Below are some of the ways to use government contractor SBA loans.

  • Refinance existing debt
  • Business acquisitions
  • Purchasing new equipment
  • Increasing operating cash flow
  • New contract bidding
  • Purchase or refinance real estate

Bridge Loans

Revolving credit is not always available when opportunities arise, such as new contracts to bid on. When there is a quick capital need for contract writers, equipment, inventory, or general working capital the best option is bridge loans.

Bridge loan programs can be closed quickly with an easy application process. The biggest benefit of bridge loans is a limited distraction from day to day operations. Some of the ways to use bridge loan programs are the following.

  • Hire contract writers
  • Purchase materials
  • Increase operating capital
  • Bid on new projects
  • Buy new equipment
  • Payroll

Business Line of Credit

The most flexible loan program for contractors by far is a business line of credit. Business owners who have ongoing capital needs as well as an operating line for standby capital is an essential in today’s business world.

Business line of credit programs are flexible, cost-effective, and provide the cash cushion that’s needed. Using a combination of an SBA loan program and a business line of credit will result in low monthly debt payments, and standby capital for when needs arise.

The following are a handful of ways you can use a business line of credit.

  • Purchase inventory
  • Hire new employees
  • Bid on new contracts
  • Purchase equipment
  • Make payroll
  • Refinance debt

Mobilization Funding

Upfront capital is needed when a new government contract is awarded. In some cases, the government contract will have a mobilization funding component, but in actual practice, government contractors often turn to mobilization financing programs.

Mobilization funding can be a crucial part of being able to perform on a newly awarded contract. Rather than turning down new contracts, you can look towards a mobilization financing program that can get you started.

Here are some of the ways you can use mobilization funding.

  • Upfront contract expenses
  • Purchasing materials
  • Buying essential equipment
  • Hiring employees
  • Making payroll
  • Operating cash flow

Business Term Loans

Government financing programs can be structured as revolving credit lines or term loans. Lines of credit are typically used for operating cash flow needs, while term loans are used for one-time purchases.

These loans provide an immediate injection of cash that amortize over multiple years. Term loan programs can be structured as an equipment loan, a multi-year term loan, or an SBA loan program. There are many ways to use a government contractor term loan program. For instance,…

  • New equipment
  • Buy materials
  • Purchase inventory
  • Refinance equipment
  • Operating cash injection
  • Purchase real estate

Equipment Financing

Equipment is an essential and determines the performance on many government contracts. There are times when equipment is provided by the government, although at times it is granted, and on other occasions it is the responsibility of the government contractor.

Instead of paying with cash, many turn to equipment financing. These financing programs can be structured as a loan, or a lease and amortize over a period of one to five years. The more essential the machinery and equipment is, the more attractive the terms of the government equipment financing will be.

Below are some of the ways to use equipment financing.

  • Purchase new equipment
  • Refinance existing equipment

FAQ About Government Contract Financing

What is government contract financing?

The U.S. government awards contracts awarded to small and medium-sized businesses help boost economic development and create more jobs. Business owners bid for these contracts and the winner becomes the one who delivers the products/services the government requires.

While winning a bid may seem like a profitable opportunity, small business owners need to fund upfront costs and other expenses before taking on a project. After rendering your services, you need to wait for the government to pay invoices, which can approximately take one to two months.

Fortunately, government contract financing helps these businesses bridge gaps in cash flow by giving them the working capital needed to successfully run their business while waiting for payments.

What are the different government contract financing options?

There are several government contract financing options available for small business owners. Among them:

• Invoice factoring
• SBA loans
• Asset-based loans
• Bridge loans
• Business term loans
• Equipment financing and…
• Mobilization funding

These are some of the loans a business owner can apply for.
The ideal type of loan depends on your business’ goals and needs which are unique for your company.

For example, if your business needs immediate funding but you don’t have enough assets to secure a long-term loan, invoice factoring may be a good option. It’s always best you speak with a financial expert and get all the details.

When is the best time to apply for government contract financing?

Many people think the best time to apply for government contract financing is after you’ve won a bid. However, we recommend you apply for one even before you win the contract. Building positive relationships with financial companies makes it easier for you to finance your business.

Having financing in place, demonstrates your ability to fulfill your role as a top-notch professional contractor.

How long does the application process take?

The application process for government contract financing depends on the type of loan you qualify for. If you need cash fast, there are financing options that can fund your business within 24-48 hours upon approval.

To expedite the process, be sure to have all the necessary documents on hand, and double-check everything before submitting it.

Is government contract financing the best option for your business?

Many companies from various industries use government contract financing to fund their contract work. However, what might work for them, may not work for your business. You need to evaluate your business to know whether government contract financing is a suitable option or not.

Start by assessing your financial capabilities, and don’t hesitate to talk to a financial expert. They can help you evaluate your business and determine which type of loan is best for you.

Learn About Your Financing Options

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