Let's talk about five ways of financing your growth along with opportunities and challenges for government contractors when winning a new contract award. The good news is there are effective strategies and techniques for financing new and/or rapidly growing businesses. Each with it's own merits and appropriate role, common features, and prevailing pricing. When you examine these factors you can efficiently evaluate your government contract funding needs, identify worthy providers, win sizeable line commitments, and command the best rates.

Opportunity and Challenge of a Government Contract Award

When a start-up or rapidly growing business wins a new government contract award, it presents a great opportunity for rapid growth. For example, a contract award may have an annual value of $1.2 million, which leads to $100 thousand in monthly billings. The challenge is to fund payroll and operating expenses. Most contracts allow invoicing once per month. Consequently, staff usually needs to work for 30 days before the first invoice can be submitted. The fastest you can expect the government to pay is 30 days from the time the bill is submitted. Thus, you will incur at least four payrolls before you receive payment from the government. As a result, payroll funding may be necessary.

Financing Solutions

1.    Bootstrapping

Using existing resources may be an answer to fund operating expenses. Forms of bootstrapping may include:

  • Generating alternate revenue: For example, owners of a start-up company may be able to delay the departure from a current employer.
  • At award time, try to negotiate semi-monthly billing even if for a brief startup period.
  • Arrange payrolls to be semi-monthly (e.g. on the 1st and 15th) rather than bi-weekly to avoid occasional months with 3 payrolls in them and time better with your billing cycle.
  • Customer prepayments: Early payment discounting may be offered
  • Supplier Vendor Financing: Ask for extended terms with a supplier
  • Bartering
  • Outsourcing with terms to pay your suppliers when you are paid.

Contract terms and business practices can have a great impact on cash flow. You have to ensure that you collect your accounts receivable (hold clients accountable to their terms), get your time sheets in and your invoices out promptly with complete supporting documentation, and negotiate favorable terms with teaming partners. These terms should be built into the contracts. Investing in the accounting structure will pay off. Finally, labor utilization should be maximized.

2.    Leverage Personal Assets, Friends, and Family

If you have aspirations to own and operate your own business you need to have sufficient equity to sustain the start up of the business. 

  • Savings are a great source of funding because cash is the undisputed, undefeated king of the business world.
  • Home Equity Lines of Credit are very effective and cost effective ways to finance the business. This is strong and readily accepted collateral. It allows the bank to offer capital to the owner who can then lend the money to the business. Interesting for government contractors may be that the value of the house is not included for the net worth calculation for 8(a) applicants.
  • Securities Accounts allow the owner to borrow against the assets in non-qualified securities accounts. Most banks and financial institutions will provide a loan up to 75% of the value.

Personal assets may be substituted or complimented through loans or investments from friends and family. It is important to always document and approach the transaction as a business transaction and to understand what you are dealing with and consider the “what ifs”. You also need to determine if the consequences of failing to meet the terms of your agreement are too steep for you to bear.

3.    Equity Investors

Equity Investors may also provide funds but, unlike the other forms of financing, will take partial ownership of the company. When searching for an equity investor, you may find three types of investors:

  1. Unsophisticated investors are inexperienced and may be high maintenance. Their time horizon is usually five to seven years
  2. Accredited High-Net-Worth Investors are lower maintenance and have a time horizon of three to seven years.
  3. Professional investors are efficient managers and consequently, have a faster turnaround. Their time horizon is usually three to five years.

Proper due diligence during the selection process of an equity investor is crucial because separating from an investor is expensive. 

4. Bank Debt

Bank debt is the form of financing, which businesses typically think of first. Banks are highly regulated to insure liquidity and stability of the banking system. That is why they lend based upon past performance, cash flow, and collateral. Bankers look at the 5 C’s:

  1.  Character
  2.  Credit
  3.  Cash Flow
  4.  Capability
  5.  Collateral

J.P. Morgan found 3 C’s and 3 P’s more fitting:

3 C’s:

  1. Character
  2. Character
  3. Character

3 P’s

  1. Can they Pay?
  2. Will they Pay?
  3. Can I Make them Pay?

Banks usually provide either lines of credit or term loans to small businesses meeting the above criteria. The following table best describes the features:

 Lines of Credit Term Loans 
Use to financeShort term working capital Fixed asset purchase
Maturity Date1-year4-years
RepaymentInterest is paid monthly Monthly payments of principal and interest sufficient to fully repay by maturity date
 Principal is borrowed, as needed, and repaid daily 
 Unpaid principal amount is due in full at the maturity date 

Asset based lines of credit may also be available to small business. Typically the line allows borrowing up to 80% to 90% of billed, eligible receivables and up to a pre-approved maximum. Availability is based on the borrowing base formula established. The borrower is required to update this borrowing base report monthly or more frequently and regularly submit financial reports. An “assignment” to the bank of the borrower’s prime contracts with the federal government is needed. The lines have a maturity of up to two years. Individuals holding more than 20% ownership in the company need to sign a guaranty.

To determine whether a business is eligible for an asset based line of credit banks look at the following indicators:

  • Business plan
  • Ability of business to repay the debt
  • Quality and type of collateral: accounts receivable, personal assets
  • Quality of Financial Statements: should be GAAP prepared
  • Relationship Partners: Look at CPA, attorney, and insurance agent and determine if they are experts in the government contracting arena.
  •  Accounting System used: should be DCAA compliant
  •  Financial strength of guarantor(s) and personal credit history

Typical financial reporting requirements during underwriting include:

Business  Personal
  • FYE financials last 2 years
  • Business Tax Return
  • Interim financials
  • Annual projections
  • Contract backlog report
  • Key contracts / scope services
  • A/R and AP aging reports
  • Capabilities statement
  • Management bios
  • Personal Financial Statements
  • 2 years personal tax returns for any owner with minimum 20% ownership in business


Financial reporting requirements for ongoing reporting include:

Monthly QuarterlyAnnually
  • Borrowing Base Certificate
  • A/R & A/P aging reports
  •  Interim financials
  • Covenant Compliance Certificate
  •  FYE financials
  • Tax return
  • PFS & tax return – guarantor(s)

SBA Lines of Credit & Term Loans

When banks alone are not willing to extend credit to a business, SBA programs that guarantee a certain percentage of the borrowed amount may be available. The line or loan is made with the bank. The borrower then pays a “guarantee fee” to the SBA (2% to 3.75%). Banks also pay an “ongoing annual guarantee fee”.
SBA Loans include:

  • 7(a) Term loans
    • Loans of $150,000 or less - 85% guarantee
    • Loans up to $5 million - 75% guarantee
  • SBA Express
    • Lines of credit up to $1 million - 50% guarantee
  • Patriot Express
    •  “Pilot Program” for businesses owned by veterans, active duty military, national guard member or a spouse or widowed spouse
    •  Max. loan amount $500,000 - 75-85% guarantee

However, not all businesses are willing or able to overcome the obstacles of the SBA programs, such as a lengthy loan process, potential interest rate increase (some loans have variable rates), and often the need for personal assets. If you are unable to obtain a bank loan, alternative financing may be a solution.

5. Finance Companies: Asset Based Lending and Factoring

When banks decline a loan request it does not mean anything is wrong with your business it simply means it does not fit within the bank’s acceptable risk parameters at that time. Finance companies may be able to help and overcome obstacles that regulated banks cannot accommodate.

  • Asset based lending is not only provided by banks, but also by finance companies. Asset based lenders are able to lend against a pool of business assets.
  • Factoring allows you to sell your accounts receivable at a discount in exchange for a cash advance.

Unlike banks, factors look at the strength of the accounts receivable rather than past performance or fixed assets. Eligibility increases as revenue increases. This may allow you to pursue more business. Next or same day funding is available when factoring. Another benefit of factoring is that it can outsource much of the accounts receivable management function, which often leads to quicker payment. Factoring improves cash flow, which typically leads to increased profits and may allow you to take advantage of early payment discounts from key vendors. Factoring allows for a rapid turnaround without red tape or bureaucracy. It may also provide additional trade credit.
Firms that borrow from finance companies include start-ups, new corporations, and companies winning their first substantial contracts, and companies that suffered some financial adversity. The profile of a rapidly growing firm is that of a company with limited history of performance, limited infrastructure, limited assets, while requiring lots of cash.
As with other forms of financing, there are challenges when borrowing from finance companies. For example, they require constant monitoring of the collateral. Finance companies spend more on a per asset basis to monitor the collateral than banks do. That is why finance companies cost of borrowing is much higher than banks. Finance companies are also unregulated. Terms and costs vary widely so a very careful analysis is required to understand terms going into the relationship.
Like banks, finance companies also require guarantees from owners and/or managers. That is based on the assumption that no one knows more about the assets than the owners and managers. If they are unwilling to guarantee their own assets, it raises red flags with the lender.
After funding growth with finance companies you usually become eligible for bank financing. To prepare for a good transition to the banks, you need to understand minimum terms, minimum funding amounts, and exit penalties before committing to a finance company. Most reputable finance companies do cooperate with a customer transitioning to a traditional banking relationship.


There are several ways to fund the growth of a small business, which include bootstrapping, leveraging personal assets, friends and family, equity investors, bank debt, and finance companies, such as asset based lenders and factors. Rapidly growing firms typically do not fit in the banks’ parameters but need to plan for the eventual transition to a bank when selecting early-stage funding sources.