WHY IS FINANCING SO IMPORTANT?
For product companies: Where am I going to get the money to pay develop/ buy the products I want to sell?
For product and services companies: Where am I going to get the money to pay the mortgage and for food for my kids when I leave my safe full-time job to work on my business?
One of the reasons government contracting is very special to me is that it is uniquely available to every American regardless of their background, in fact the tougher your background was the more likely you are to succeed in this market. And what makes it unique is that it takes ALMOST NO MONEY TO START.
Now I know I’m over simplifying and there are real structural financial struggles for new businesses in this market but this is a pretty amazing quality that should be celebrated!
What can you do to finance your business while you are waiting for your first win:
Product companies: Product companies do need real capital to build a prototype, test it, and bring it to market.
To bridge this we recommend looking at government grants (see our SBIR classes ) and consider going to VCs
Services companies: If you are starting a services company getting start-up capital from investors is going to be tough but here’s the good news. You don’t need it. Serioulsy you can start a services company for a couple thousand dollars in registrations and legal fees, and couple thousand to bridge your payroll cycle when you win your first work. Pretty reasonable…
For anyone: Government contracting is time consuming, but most of that time is waiting for RFPs to come out, or writing proposals so PLEASE do not leave your day job during this period. Even after you’ve won your first contract don’t quit your job, wait until two weeks before you have to show up to work at the government site then give two weeks notice. Or even better staff your buddy so you keep your day job. If you can do that a couple times you will have built a business with next to no risk to you or your family.
Financing your first win: There is a catch to government contracts generally, and services contracts in particular and that’s how to pay for the start-up costs associated with a win.
Imagine you need to staff three people on the contract you won. And for easy numbers each person costs you $120K a year between salary and benefits, or $10K a month.
1) Now good people aren’t going to just hangout on the sidelines for your contract to start, so imagine you bring them on a month before the work begins to secure the people you want
2) You invoice the government after 2 weeks of work, and a miracle happens and you get paid on that invoice in 2 weeks so there is another month there.
3) so that is two months of you paying salaries etc to three people, at $10K a month, which is $60K before you get your first payment from the government.
So where does the money come from? I’m glad you asked and in the following chart we have outlined the options and under what circumstances they might be appropriate for you and your business.
HOW MUCH DO YOU NEED
The amount you need is hard to say but I’d say that 3 months of expenses is a good target, so in our previous example of three people at $10K each a month you’d want $90K in the bank or in a line of credit
I know this can seem intimidating but thousands of companies before you have figured it out and once you get ahead of the payment cycle you are sitting pretty!