New York, NY — [November 15, 2023] — Our first ever report reveals the extent small businesses (SMBs) feel unable to win or even fulfill government contracts, despite record levels of government investment in helping them do so.
The report, which surveyed US SMB owners, examines the barriers that are keeping US small business owners from taking advantage of the $162.9B* in federal contracting opportunities awarded by the US federal government.
Though many SMBs should be eager to take the opportunity for consistent revenue and reputable business that comes with winning government contracts, the obstacles they face make it difficult not just to obtain federal contracts but to fulfill them. Since interest rates are an all-time high, it’s hard for small businesses to borrow money as a solution to the latter problem.
Here we take a look at what’s hurting small businesses when it comes to federal contracting and how small businesses can meet the demands of government purchase orders.
Support for federal contracting
Small businesses have been prioritized by the Biden Administration’s federal procurement strategy. In particular, as Federal News Network reports, “as part of its equity agenda [the government] has set a higher bar for making sure more of that federal contract spending goes to minority-owned small businesses.” In 2022, the government awarded a record level of 26.5% of federal contract dollars to small businesses, past its goal of 23%.
Despite this, the overall number of SMBs winning government contracts has dropped significantly, with a 40% decrease since 2010. There are a significant number of resources and programs put out by the Small Business Administration (SBA) designed to assist small businesses in winning federal contracts, i.e. advice, mentoring, access to capital, and application assistance. These resources are under-utilized.
Yet even with increased opportunity, the pool of SMBs taking part in these federal contracting opportunities is shrinking. Let’s dig deeper into why this may be happening.
Key survey findings
In our survey of 251 small businesses with fewer than 50 employees, over 70% of surveyed said they were aware of the fact that government contracts are lucrative and reliable—but more than 50% said they did not know the specific contracts that were available to them.
Most urgent of all is the fact that a quarter of US small businesses (29%) are completely unaware of how the federal government awards contracts to small businesses.
The headline impact is that businesses are losing out on $84 billion worth of government funding for federal contracting targeted at small businesses.
The barriers to federal contracts for SMBs
Cash flow and working capital
Setscale CEO Daniel Fine explains: “Government contracts are fierce competition for US small business owners for a reason. They’re reliable, well-valued, and often lead to steady sources of income.
“However, due to a lack of knowledge of the specific government contract awarding process, business owners are unsure if they can fulfill the government’s open purchase orders without pursuing a line of credit from a bank or financial institution.”
The survey data shows that the main obstacle for SMBs in the US securing government contracts is a lack of time and resources—including cash flow and working capital issues. In general, 69% of SMBs surveyed said they struggle with cash flow, with 50% stating they occasionally struggle and 18% citing this as a constant problem.
These two pain points are directly related to SMBs’ failure to secure government contracts and were the second most popular reason (22%) cited by those business owners surveyed, behind not having enough time to research the opportunities (25%).
Filling government purchase orders
Even when securing a contract, nearly 70% of SMB owners claim their struggle with both cash flow and working capital stops them from meeting the contract’s demands. One consequence of this is that many turn to lines of credit from banks or financial institutions to fulfill purchase orders—despite these being costly and hard to acquire.
Over a quarter say that time and resources are the biggest reasons small businesses aren’t securing government contracts. On top of this, for 18%, a lack of working capital was stopping their business from fulfilling a government contract order they had won.What small businesses can do
In a separate article, we outline how SMBs can get the most out of the resources available to them from the Small Business Administration (SBA). Yet businesses can do more than use government support systems.
Purchase Order Financing
As the survey data indicates, the inability to fill government purchase orders is a significant barrier for small businesses delivering on government contracts. Instead of relying on time-consuming conventional bank loans (which are difficult to access for small businesses),
Setscale offers flexible PO financing solutions, supporting businesses to fund large orders after receiving a PO. This allows them to increase capacity and meet demand for lucrative and valuable contracting opportunities.
Small businesses can gain a lead on their competitors for federal contracts by networking. Attending conferences, trade shows, and other industry events is a promising path to connect with government personnel and stakeholders—boosting their presence and providing a chance to build up their reputation as a reliable partner.
Federal contracts are announced through a Request for Proposal (RFP), inviting bidders to submit a response in application to win their business. To ensure the best chance of success, small businesses, in particular, should thoroughly research the market and previous contracts from that government department. This will help them understand what is at stake and how they can prove their suitability for the job when writing the submission.
Get fast and flexible PO financing
Federal contracts hold potential for SMBs, but winning and delivering on them is more complicated than many may hope. At Setscale, we understand the opportunity cost of taking on government purchase orders when a business is experiencing cash flow or working capital issues.
That’s why we tailor our PO financing to help businesses scale while maintaining momentum. Our solutions have helped many businesses with their government contracts—including founders from disadvantaged or minority backgrounds.
*Amount in government contracts awarded to small businesses in Fiscal Year 2022.