As most small business owners who attended the Minority Business Development Agency’s Minority Enterprise Development (MED) Week knows, in the end, it’s all about the money—access to contracting dollars and the capital required to perform. To conclude last week’s conference, entrepreneurs were given one-on-one and group opportunities to learn about government, traditional and alternative sources of financing.
Many government contracts require a company to furnish the federal government with a performance bond to protect the investment made by the federal government and a payment bond for suppliers of labor and materials. In addition a bid/proposal bond also may be required.
For example, before a Department of Transportation contract exceeding $100,000 is awarded, a bond is required.
To help assist small business owners with the process, the government recently established a $20 million bonding fee reimbursement program that small business owners can use to apply for reimbursement of bonding premiums and fees required to compete for or perform on transportation infrastructure projects funded by the American Recovery and Reinvestment Act, announced Jerry Franco, a chief of the DOT ’s procurement assistance division. The goal is to help firms that traditionally have less working capital than large contractors participate in the Recovery Act’s investment in transportation infrastructure projects and the funds must be spent by September 2010.
“On any project, the cost of a bond can be anywhere from between one to three percent. If you look at some of the construction projects, the difference between winning and losing bids is sometimes less than one percent,” Franco explained. “So if we’re able to pay for the cost of the bond for a disadvantaged business enterprise (DBE), we feel it will put them on a more level playing field.”
To receive reimbursement, firms must submit proof of what they paid for a bond and that it’s for a DBE-certified project, “and we’ll send them a check,” said Franco.
The department also offers a short-term loan guarantee program at prime interest rates for firms that have been awarded a contract or need to get pre-qualified. Loans cannot be used for start-ups; mobilization; equipment purchases; refinancing of existing debt; payment of non-current taxes and payments to stockholders are not allowed.
“It gives you operational money to start the contract while waiting for first payment. You have to hire folks and may need to have them on payroll for 30 days before you’re eligible to submit that expense and then it takes another 30 days to get paid,” Franco explained. “If you’re a subcontractor it’s going to take longer because the prime has to submit his invoice. In the meantime you have expenses, people who need to get paid and that’s what the purpose of this loan is.”
Franco said that DOT plans to develop a bonding education program with a trade association to help firms that cannot qualify for bonding on their own.
Dannette Render, president and CEO of the Ohio-based DAR Public Relations Inc., has first-hand experience with the need to be able to finance a contract before that first payment comes in. Her firm has executed several contracts with the departments of Transportation, Treasury, and Health and Human Services, designing outreach and marketing campaigns and events.
During one of the one-on-one financing sessions, Render met with Becky Cronister, president of Action Capital Corp., which provides alternative financing for account receivables. Cronister says Acton’s qualification standards are easier because they’re based on an incoming invoice rather a balance sheet. Some firms, she added, will charge interest based on a receivable’s entire amount but her firm applies charges only to the amount borrowed.
Danner was certainly encouraged by Cronister’s pitch. “She has some very creative approaches, like how to negotiate with creditors that need to be paid off,” said Danner, who plans to continue the conversation. This kind of financing, she says, allows small businesses to take a proactive approach and move a lot faster on a contract.