Unlocking the door to government contracts: A lifeline for small businesses

Government contracts can represent a gateway to sustainable growth for small businesses.

The U.S. government is the largest customer in the world, and purchases many different products and services to meet its various objectives. In its procurement strategy, the government is required by law to buy a percentage of its requirements from U.S. small businesses. The aim of this is, amongst other things, to support small business job creation, which helps boost the U.S. economy, and gain access to the unique ideas small businesses provide. Set-asides for small businesses account for 23% of government contract dollars, but hurdles to accessing these contracts still exist.

Biden-Harris administration expands access to federal contracts

Government contracts can represent a gateway to sustainable growth for small businesses. They can offer stability, reliability and a steady source of income, qualities that are especially valuable in today’s uncertain economic landscape.

In positive news for small businesses, the Biden-Harris administration has recognized this and further expanded access to federal contracts, including to socially and economically disadvantaged businesses. By setting a bold goal of allocating 15% of federal contracting dollars to small businesses owned by socially and economically disadvantaged individuals by fiscal year 2025, the administration is signaling its dedication to fostering inclusive economic growth and empowering small business owners from underrepresented communities. This has paid off. In fiscal year 2022, small businesses received nearly $163 billion in federal contracting dollars.

Awareness and understanding of federal contracting for small businesses

However, despite these encouraging figures, challenges persist.

Research from Setscale, a purchase order financing company, shed light on this issue. More than half (52%) of U.S. small business owners surveyed are unaware of the lucrative opportunities associated with securing federal government contracts, resulting in an estimated loss of $84 billion to the economy annually.

This demonstrates how a lack of awareness and understanding of the federal contracting process remains a major barrier for many small businesses. Setscale’s research underscores this point, revealing that just under a third (29%) are completely unaware that the federal government awards contracts to small businesses. This knowledge gap not only hampers small businesses’ ability to compete for federal contracting dollars effectively, but also represents a significant missed opportunity for economic growth and job creation.

Navigating financial hurdles: Access to capital

According to Goldman Sachs’ 10,000 Small Business Voices survey, and aligned with the results of Setscale’s research, only 34% of small business owners believe they have a good sense of federal government offerings. Furthermore, 63% grade the federal government a C or below for the effectiveness of programs, services and tax credits available.

Moreover, access to capital continues to be a pressing issue for small businesses seeking to fulfill government contracts. Many small businesses struggle to manage cash flow and retain enough working capital, making it difficult for them to meet the high demands of government contracts. Traditional financing options, like bank loans, are often inappropriate because of drawn-out and exclusionary application processes, exacerbating their financial challenges.

Key solutions for small businesses lie in the innovative alternative finance sector, which has built many offerings tailormade for small businesses and the unique challenges they face. For example, purchase order financing works by providing small businesses with the necessary capital to fulfill purchase orders when they come in, which is especially helpful if a very large order comes in from the federal government. Alternative financing models not only address the immediate cash flow needs of small businesses, they can also empower them to scale their operations, and compete more effectively in the marketplace.

Policy priorities

To empower more small businesses to take advantage of the government contract opportunity, concerted efforts are required on multiple fronts. First and foremost, there is a clear need for more education and awareness initiatives to inform small businesses about the availability and benefits of government contracts. This can be achieved through targeted outreach programs, workshops and online resources aimed at demystifying the federal contracting process, empowering small businesses to navigate it successfully. These already exist, but more needs to be done to ensure more small business owners are reached.

Secondly, policymakers must continue to prioritize initiatives that enhance access to capital for small businesses, particularly for those owned by individuals from underrepresented communities. This includes expanding and strengthening programs like the Small Business Administration’s Empower to Grow (E2G) program, which provides technical assistance and training to help small businesses pursue government contracts.

Finally, there is a need for greater collaboration and coordination between government agencies, financial institutions and private-sector stakeholders to streamline the federal contracting process, and ensure small businesses have the support they need to succeed. By working together, we can unlock the full potential of government contracts as a catalyst for small business growth, and economic prosperity.

Government contracts represent a valuable opportunity for small businesses to thrive and prosper in today’s competitive marketplace. However, a concerted effort is required to address the barriers that stand in small businesses’ way, including lack of awareness and access to capital. By investing in education, innovation and collaboration, we can create a more inclusive and resilient economy, where more small businesses have the opportunity to succeed.

Daniel Fine is founder and CEO of Setscale.

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