How to Win (& Finance) Government Contracts

No one can invest in your small business like Uncle Sam. The U.S. government pumps more than $1 trillion each year into both small and large companies in the form of government contracts. Nearly $440 billion of that goes to small businesses according to Business News Daily.

how to finance a government contract

How to Win & Finance Government Contracts

Many of these contracts are specifically available to Small Disadvantaged Businesses (SDB) or to enterprises that are veteran-owned or minority-owned. The government sets formal goals for the kinds of businesses in which it wants to invest its contract dollars.

  • 23% of prime contracts to small businesses
  • 5% of prime and subcontracts to women-owned small businesses
  • 5% of prime and subcontracts to small disadvantaged businesses
  • 3% of prime and subcontracts to service-disabled-veteran-owned small businesses
  • 5% of prime and subcontracts to HUBZone small businesses

Government contracts offer heavy-duty revenue streams that can provide significant value to your small business. But not just any company can secure a contract. Getting government contracts for small businesses takes time, attention to detail, and an ability to execute fast and accurately. Your business may be able to take advantage of some of these dollars, but to do so, you have to know how to win and finance government contracts.

If you are ready to take advantage of federal business opportunities, here’s how to get started.

How to Win Government Contracts

When working with the government, your business absolutely must have its operations and business processes aligned with U.S. government standards. You need to know the products or services you sell intimately. Plus, you have to make sure your manufacturers, sources, and vendors meet federal standards. In short, overprepare before bidding on government contracts.

  1. Identify the product or service you want to sell.

    The federal government requires prospective contractors to match their product or service with a code from the North American Industry Classification System (NAICS). These codes are available on the NAICS website. In the old days, would-be contractors had to sort through the Census Database. Today, it’s a simple matter of either typing the product you sell into the search bar or using the Industry Code List, both easily accessible on the site.

    NAICS codes help the federal government maintain data on businesses according to factors such as industry, economic sector, and country of business. You may need several NAICS codes based on what you sell, so make sure you acquire all you need. When you enter data later on the System for Awards Management (SAM), you’ll have space to put in multiple SAM codes.

  2. Obtain a DUNS number.

    Short for Data Universal Numbering System, the DUNS number acts as a credit score for a business. Becoming a government contractor requires your business to show reliable credit behavior. You’ll need a DUNS score for each location of your enterprise.

  3. Register on the SAM website.

    Before you can win a government contract with most agencies, you must be entered into the SAM website. The Small Business Administration and the Department of Veterans Affairs only contract with SAM-registered businesses. Once registered with SAM, you can receive your Commercial and Government Entity (CAGE) code. You will need the CAGE code for legal clearances and pre-award surveys. There is no cost to obtaining a CAGE code.

  4. Start looking for contracts through Federal Biz Opps.

    Federal Biz Opps is your one-stop-shop for federal contract searches. It’s free to sign up for notifications about potential contracts in your field. You can also search the database using your NAICS codes. When you spot a likely contract opportunity, be sure to read the fine print because some contracts fit your NAICS code, but they are only open to select contractors. In those cases, your low bid or fantastic service option will not be enough.

  5. Create your bid or proposal.

    Now the hard work starts. Once you find a contract opportunity that fits your business, you need to craft a bid or proposal that fits the style, format, and needs expressed in the request for proposals. Usually, the request on Federal Biz Opps lists a contract agent’s name. Don’t be afraid to reach out to your agent with any questions about how to bid on government contracts.

After you’ve submitted your bid or proposal on time and in the requested format, it’s a waiting game. Nothing you can do will spur the U.S. government to choose a vendor and make an award any quicker. If your proposal is not selected, don’t be discouraged. Many contractors submit multiple bids before one gets through the rigorous selection process. Should your proposal be chosen, however, your real work has only just begun. Now, you have to deliver the goods.

How to Finance a Government Contract

Winning the contract was the (comparatively) easy part. Here’s how becoming a government contractor works:

The U.S. government has the mandate to work with small businesses. Most likely, the government buys whatever you sell. So, you find the right contract, apply, and win. However, most small businesses don’t have the funds to fulfill the contract they just signed, and completing the job can be costly. Purchasing goods at scale can outstrip the budget, for instance, and operational costs associated with government contract work can push a small business into the red.

Besides, most government contracts pay net-30 to 60 days. That means the time between when you spend the money and when you get your check from the federal agency can run 4-8 weeks or even longer. If there is any mistake in invoicing, sourcing, or accounting, you could find yourself waiting several months while the paperwork clears. Most small businesses are not equipped for that kind of delay. If your cash flow falls far enough behind, you may not even be able to pay your vendors.

That’s where government contract financing comes in.

Start by obtaining financial capability certification before you ever apply for a grant. By going through this program, you can gain contingent financing commitments. You can demonstrate to U.S. Government contracting officers that you possess the financial wherewithal to execute on contract awards.

Certification can help businesses win more and larger contracts while some contractors choose to try to cobble together the financing themselves through microloans and asset-based lending. Many turn to established companies with a reputation for excellence in government contract financing.

How does government contract financing work?

Different companies have distinct needs and opportunities. However, most financing comes down to receiving flexible funding through term loans or lines of credit. This could include supply chain financing, purchase order financing, or invoice financing. The result is that you have the cash you need to keep running and growing your business even during the lean times between government payouts.

One major form of financing is called government contract factoring. In this kind of factoring, a company sells the invoice of completed government contract jobs. The contractor sells incoming monies to the financier. The company that buys the government invoice called the factor takes responsibility for collecting the money. Typically, that means their staff follows up with the responsible civil servants through email, letters, or over the phone.

In government contract factoring, the finance company makes money by buying the invoice or purchase order at a discounted rate. For example, a seller may give the invoice to the factor in exchange for funding of 90% of the amount billed on an invoice. After the factor collects all the invoiced money, the original contractor gets the final 10% of the invoiced amount minus a few points to cover the factor’s services.

A company that has won and completed a government contract may be willing to sell the invoice for the job to get the cash needed to continue fulfilling the contract. If a company needs money after a completed government contract and can’t wait 30-60 days to receive payment, to sell the invoice to a factoring company can be a smart way to jump-start cash flow.

It takes most contractors about 1-2 weeks to qualify for a factoring program, putting them in the perfect timeframe for government payout schedules. In general, factoring is an excellent finance option for small businesses to keep working capital on hand, especially in the early days of a government contract.

Paragon Financial brings nearly 26 years of experience in government financing to bear on each transaction with a contractor. The team can move quickly on high-growth government client approval and offers up to 90% advance rates with online invoice submission. Learn more about how we work and our famous “soft touch” approach today!


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