How Can You Fund a GovCon Business?
Tony Gray and Matthew Gillman walk through every source of capital a growing government contractor can reach, from friends and family to private equity, and when each one fits. The short version: what you are doing with the money should decide where it comes from.
Where can a small government contractor get capital?
Tony Gray: Think of it as layers that change as you grow. Friends and family, including your own money, come first. Then venture capital, credit cards, banks, private credit and, at the top, private equity. Which layers you can reach depends on your stage: startup, small business, growth or midsize. Under about a million dollars in revenue, friends and family is typically what a startup taps.
What are the pros and cons of friends and family money?
Matthew Gillman: It is very common at the early stage, and it is the opposite of institutional money. You are relying on people who know you, trust you and believe you will be a good steward of their capital. That comes with an emotional cost. You are not just thinking about your own pocket but your friend’s and your family’s, and that fear can stifle growth.
But it is the path of least resistance. Nine times out of ten, people start with their own money, take a couple of checks from friends and family, and get going.
Tony Gray: Your own money has a long-term cost too. Money taken out of a 401(k) stops growing.
Do government contractors need venture capital?
Tony Gray: Usually not. Venture capital fits a contractor building software or a product, something tangible with strong intellectual property and the potential to be a billion-dollar company. In professional services you rarely need it, and investors are unlikely to offer it.
Matthew Gillman: It also costs time. With venture capital you have to prove you will create a tremendous amount of value in the future, and you will spend as long building presentations and proving your business model as you would writing a one or two page document and taking a check from family.
Should I use credit cards to fund my business?
Matthew Gillman: Every type of funding has a use case. Revolving credit, whether a credit card or a bank line, is for day-to-day working capital: you use it and you pay it back. A credit card costs nothing if you pay the balance, but carry a balance and it gets very expensive. It is the last place to hold one.
Tony Gray: I learned that the hard way. When I started my own government contracting business I bought servers and routers on credit cards and carried the balance, and it was expensive over time.
Why won’t my bank grow with me?
Tony Gray: Banks lend to everyone from startups to billion-dollar companies, but they require financials that meet their standards, analyze your business in detail, and can take weeks just to give you a decision.
Matthew Gillman: Banks are the lowest-cost option, but you have to be at the right stage for one. Early on, a bank lends on your personal credit. With a 750 or 800 score you might get a $50,000 or $100,000 line, because they are comfortable with you as the guarantor.
The problem comes as you grow. A bank wants two or three years of financials that support the debt going forward. If that $50,000 line got you started and you now need $500,000, the bank will say the last six months look great but the last three years do not support it. Good credit gets you a small line. After that, you need something that grows with you.
Tony Gray: Expect to be scrutinized both personally and as a business. In return, a bank is typically your lowest cost of credit.
What is private credit, and how is it different from a bank?
Matthew Gillman: Private credit is meant to be more creative and more customizable, and to grow with early-stage companies. What we do is advance money against assets: receivables and contract value, meaning work that has been performed and is waiting to be paid.
For a growing government contractor, receivables are the asset that keeps growing with the business, and so do its expenses. We bridge the gap between accounts payable and accounts receivable, turning accrual-based profit into cash. A company that goes from $1 of revenue to $100 needs money to support that.
Private credit covers term loans, lines of credit, asset-based loans and equipment loans. Banks offer the same products, but to middle market companies and large corporations rather than small and medium-sized businesses.
Tony Gray: Put simply, private credit is an alternative to the banks, with many of the same products.
Should I go to my bank or to private credit first?
Tony Gray: Go to both. Then you can see which moves faster. A bank can take weeks; private credit can approve you in days, with faster underwriting and more flexibility.
Will you pay more for private credit? Typically, yes. You are paying for speed, convenience and a provider that understands your market. Look for one that specializes in government contracting and also understands small and middle market businesses more broadly. GovCon Funding is GillmanBagley’s government contracting division, and GillmanBagley also lends to logistics and commercial companies.
What is private equity, and what does dilution mean?
Matthew Gillman: Private equity comes later than venture capital, and it is an equity raise: you dilute your ownership in your own company to bring in capital for growth. It fits when you have to invest heavily in technology, products or a manufacturing line to reach revenue later. Expect to be on the road for six to nine months finding the right partner.
Whether it is equity or debt, find someone who understands your business. Ask whether they serve other companies selling the same thing to the same customers. If they do not, they are not bad, but the relationship will be slower to get going because they do not know the paperwork, the process or the information, and that slows down what you need, which is capital.
Tony Gray: Dilution can come from friends and family too, when a relative wants a share of the business in return for the money. You will not have that with a bank or with private credit. Private equity can also mean a complete buyout, which is the outcome most owners built their business for.
How do I choose the right type of capital?
Matthew Gillman: Ask what you are doing with the capital, because that is tied directly to the type of solution. Some needs call for a revolving line, some for equity, some for term debt. What you are doing with the money should drive the product you look for.
Read more on this
- The complete guide to government contract financing
- The credit products government contractors actually use
- Government contractor loans, compared
This is an edited version of the conversation: spoken repetition is removed and each answer leads with its point. Every figure and example is as said in the episode. For financing specific to your business, talk to us.
Ready to fund your contract?
No obligation, talk to a govcon financing specialist, not a call center. We'll structure capital around your award.