Contractor financing is a win/win lending program for both small businesses and for agencies with large projects to complete. It makes it easier for government and private agencies to find, hire and pay local small businesses. And the mobilization capital it provides has a big impact on less established contractors that often struggle to compete with larger firms.
Contractor Financing Creates Opportunities for Underserved Small Businesses
The Infrastructure Investment and Jobs Act recently added $550 billion in government infrastructure spending. Those funds have already begun to fund construction projects all over the country, increasing opportunities for small businesses and local contractors. In addition to government agencies, private organizations are looking to support more underserved minority- and women-owned businesses (MWBEs) as they plan their projects.
The past two years have seen a surge in new businesses opening up, a record number of which are minority- and women-owned contractors. These communities have historically lacked access to capital they need to grow.
Smaller contractors support their local communities with jobs, fair wages and benefits. Their role is essential, but when it comes to winning contracts for large projects in their neighborhoods, a lack of mobilization capital is a barrier to opportunity. To scale up, hire staff, buy supplies, and purchase or rent equipment, funds are needed to start the work before the first payment comes in.
If you learn about how contractor financing works, you see that it benefits local underserved businesses by making it easier for the agency to procure and pay for their services.
Contractor Financing Changes the Procurement System for the Better
Coming out of the Great Resignation, government and private agencies that want to support underserved small businesses are prioritizing diversity in procurement. But hiring smaller contractors has to be done responsibly, or the agency and the small business both take on heavy risks.
- The agency doesn’t have the tools in place to vet bidders and find small but qualified candidates. If they can’t make an informed choice, they risk subpar work or delays.
- Smaller firms may not have proper invoicing capabilities. And when invoices are submitted, approval processes at the agency often slow down the payment, risking delays of weeks or months before the contractor has any income.
To overcome these challenges, a lender joins the relationship between the agency and the contractor.
The lender, or the source of the financing, helps the agency to pre-vet bidders using the risk analysis tools it uses for loans. Qualified contractors are then preapproved for a percentage of the contract value, which will give them the capital they need to mobilize. Now, the contractor doesn’t have to pay up front for everything they need to get started.
The exact process varies by project and by agency, but in simple terms, the lender gets paid back when the agency pays the contractor, bypassing invoicing for the project’s early stages. The best part is, now the small business has the foundation it needs to reach the next level in its business journey.