Why is it that Small Businesses have such difficulty obtaining government contracts?
According to the US Committee on Small Business and Entrepreneurship, “Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,” at least, according to Senator Landrieu.
To understand the true reasoning behind this phenomena, Congress and President Obama need to look closer at the banking industy. The general consensus among banks is that they do not want to lend against government receivables. When asked why, the answer is that “it’s hard to collect from the government”. Imagine that! The very banks that are willing to be bailed out by the government and that are willing to sell their toxic assets through government programs, don’t believe that a receivable from a government agency is worth the paper its written on.
Don’t take my word for it. Ask any underwriter. Banks HATE to lend against government receivables. It’s practically a mantra in the small business banking industry. While the customer isn’t told this, underwriters verbally cite the banks unwillingness to lend against government contracts and receivables as a primary reason for not approving the loan when they are challenged on the declination by business account officers. Perhaps the government needs an oversite committee that requires banks to report how many loans they turn down to borrowers that have government contracts or are seeking financing for new government contracts. This would be a worthwhile project for the Small Business Administration.
Additionally, the typical small business that can actually make it through the paperwork and obtain the contract, usually needs to borrow significantly more than they have historically borrowed in the past. Winning the contract usually means that they will need to obtain additional working capital financing in order to support the cash flow requirements to meet their new contractual obligation. Banks don’t lend on the come. These small business owners need to have established past revenue, profitability and debt service capabilities in order to obtain new lines or line increases they’ll need to service these contracts. And SBA guidelines hold them to similar standards and therefore they are not a solution to this problem.
If the business has done work for the government in the past and those receivables are aged over 60 days, the banks discount them completely.
Then there is the general lending guideline prohibiting loans where there is a concentration of receivables. If a small business wins a government contract, it is likely that that the contract will create a concentration in revenue stream and receivables (those from the government) as compared to the rest of the borrower’s customer base. Banks can easily use this as an excuse not to make the loan.
Another likely reason to be declined is the new “debt service coverage” analysis that each working capital line is now stringently subjected to. While we all know that working capital loans are repaid from asset conversion: Inventory into Cash or Receivables into Cash; the banks now take the working capital line and hold it to full debt service coverage ratios typically calculated using a three year amortization. This normally can’t exceed 1.5; and that’s only if the banks are being generous. The average company that wins a government bid cannot pass this test…. which I might add is being imposed on the banks by the regulators.
These small business could go to non-conventional sources of funding like accounts receivable financing companies. AR Funding is a good example. And while the business owner will have a better chance of getting the financing through these funding companies, the cost of funds are significantly higher than conventional bank financing. Profit margins on government contracts are typically low and so non-conventional sources for working capital can translate into losses on the jobs taken. No business can be expected to fullfill government contracts at a loss or on margins so thin the risk of taking the job is not justified.
Perhaps during this crisis, the government could provide an interest subsidy written into the value of the contract, so that more small businesses can effectively compete for their share of these contracts. That’s a direction I wouldn’t mind seeing my tax dollars go.
I am always disappointed to read government press releases like this one. Our Congressional leaders are letting the banks get away with their refusal to meet the financing needs of the small business community which is a fundamental obligation of our banking industry. Small Business doesn’t have a chance in hell of fighting the system from the bottom up, on a case by case basis. The only way this will change is if our Regulators and Congress stop all their rhetoric and become small business advocates. It is time that they hold the banks accountable for putting up barriers that stop our government from meeting their statutory goals in small business contract programs.
September 22, 2009 WASHINGTON – United States Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu, D-La., today held a roundtable focusing on ways the federal government can increase contracts awarded to small businesses by improving government contracting programs. In 2008 small businesses received $93.3 billion in federal contracts, an increase of almost $10 billion from 2007. However, these contracts made up only 21.5 percent of contracting dollars. The government’s statutory goal is to spend 23 percent of contracting dollars on small businesses.
The roundtable, “Small Business Contracting: Ensuring Opportunities for America’s Small Businesses,” discussed the challenges small businesses face in obtaining government contracts, including: contracting under the American Recovery and Reinvestment Act, contract bundling, size standards, and a lack of protections for sub-contractors.
“Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,” Senator Landrieu said. “We can do better. President Obama has pledged to help expand small business contracting by increasing public knowledge of federal contracting opportunities and I will continue to do the same. We all know that there is still much work to be done.”
“Federal contracts provide vital economic benefits for small business – yet, regrettably, the Federal government consistently fails to meet its goals for small businesses in general and service-disabled veteran-owned, women-owned, and HUBZone firms in particular,” said Ranking Member Snowe. “This is simply unacceptable, and the testimony from today’s witnesses offered specific and realistic solutions for increasing small business participation in Federal contracting and for the government to not only achieve the statutory small business goals, but to exceed them.”