Selling goods to the US government is a desirable opportunity for businesses of all sizes. In 2022, the federal government awarded a total of $682.6bn in government contracts to private businesses, with small businesses receiving $159bn.
Government contracts are well-valued and often serve as gateways to a steady source of income that can drive business growth. As a result, the competition for winning contracts is stiff. However, the successful bidders also face a dilemma if they don’t have enough working capital to complete the contract order.
To make sure they can meet demand, many businesses pursue lines of credit from a bank or financial institution. This article explores how purchase order (PO) financing is often the preferred option when business owners are unsure if they can secure and fulfill a valuable government contract due to a lack of working capital.
PO Financing Government Contracts
When government entities need goods or services — whether for office equipment, vehicles, construction materials, technology, etc. — they award contracts to and purchase from businesses large and small.
The businesses (particular small ones) who are usually eager to take on government purchase orders often have to pay their suppliers in advance. Since government purchase orders tend to be large, completing the order can cost more than the business’s available working capital .
Purchase order financing serves to bridge the gap between supply and demand. It provides upfront payment to suppliers so that businesses can manufacture and deliver the goods to the government. The business owner can secure and fulfill the contract, and pay back the financing when the government pays.
How it works
Following a government entity issuing a purchase order to a business, the business may assess its available funds and decide to use PO financing:
- Business applies for PO financing
- If approved, the PO financier pays the supplier to complete the order
- Supplier makes/sends the product to the government (post-inspection)
- Business invoices government
- Government sends payment directly to the PO financier
- PO financier deducts fee from payment, before sending remaining balance back to the business
Why Use PO Financing for Government Contracts?
Although the procurement process differs from the private sector, PO financing presents similar advantages for government contracts as it does for commercial buyers.
Working capital access
Large government contract orders often require businesses to quickly access capital to deal with supply costs. Obtaining traditional bank loans can be a lengthy process compared to PO financing. PO financing allows a small business to quickly bid on a contract and finance the full transaction.
Government contracts vary in value, and buyers often increase the order size over time if the contract continues. PO financing allows businesses to scale operations to meet the size of order. PO financing can also be customized according to the contract duration, delivery timeline and the nature of the business-supplier relationship.
Cash flow management
PO financing can cover 100% of a government purchase order. This allows a business to seize the valuable opportunity without worrying about depleting its cash on the balance sheet. Existing capital can then be used to bring in more revenue through product development, sales and marketing.
Before taking on a government contract with the help of PO financing, it’s important to be aware of the specific requirements of government procurement.
When a bid opportunity is published, the statement of work (SOW) explicitly provides the contract delivery deadline expected by the government. Completing the order within the set time frame becomes a contractual obligation.
Governments may require businesses to make financial guarantees that these conditions are met, for example, in the form of performance bonds. These are typically provided by banks or insurers.
Government contracts require vendors to have the right licensing, insurance coverage and regulatory compliance (i.e. labor and environmental protection laws). A business hoping to win a contract bid should be careful to assess the eligibility conditions in the contract to prevent delivery failure, loss of revenue and wasted time.
Setscale offers flexible support for government contracts
Government contracts are great opportunities for businesses of many sizes, but meeting demand is not always simple. At Setscale, we understand first-hand the pain of turning down exciting opportunities because of uncertainty around working capital. That’s why we offer flexible, scalable PO financing solutions to help businesses increase their capacity and keep momentum. You can read more about our solutions or fill in a request form today to get started.