How small, diverse contractors can bridge the ‘capital gap’ on civil contracts

Dive Brief:

  • Small, diverse construction contractors face a “capital gap” that often limits their success, even after they win lucrative government contracts, a Biden administration official said, while outlining potential government-backed loan programs they can pursue to clear these hurdles.
  • Veronica Pugin, senior policy advisor to the Small Business Administration’s Office of Capital Access, described how small-, women- and minority-owned contractors are often elated to win a federal construction job, but are then stymied by the underwriting requirements for the capital resources needed to actually do the work.
  • “Getting a contract like the ones being discussed today could be completely life changing for that small business, for that family, for that multigenerational access to business expansion, ownership and real estate,” said Pugin, herself the daughter of first generation immigrants. “The unfortunate experience that I see is they get the contract, and they don’t get the financial resources to be able to fulfill the contract.”

Dive Insight:

Pugin, whom President Joe Biden appointed to SBA in August 2021, gave her remarks during a Construction Inclusion Week webinar hosted by the General Services Administration looking at different aspects of supplier diversity in the construction industry.

A series of webinars this week have looked at issues from getting executive buy in to creating an inclusive culture on projects for the second annual CIW, the industry’s effort to increase diversity within construction, while reducing bias-motivated events such as the placing of nooses and racist graffiti on jobsites.    

Pugin said one of the biggest head scratchers for small, diverse businesses, once they win a contract, is the underwriting process that lenders use to approve a loan for working capital. That cash is often used to hire workers, rent equipment and fund the company while a project is underway.

“Small business owners sometimes think, ‘Well, I got the federal contract, shouldn’t that be enough for the lender or the bank? For sure, this revenue is going to come in,’” Pugin said.

But what’s often missing for those borrowers is collateral for that type of loan that they could otherwise sell, to pay a lender back if a project goes off the rails.

“The lender can’t just take that contract and sell it to get ‘recovery value,’ as it’s referred to. So that’s the gap. And that’s where we need to be working, either with lenders who can take that contract as security enough, or other programs that reduce the risk to lenders.”

Pugin, who previously held positions at LinkedIn and Deloitte Consulting, highlighted resources that can help contractors in that situation, including the SBA’s 7(a) loan program, which is specifically designed to provide working capital to small businesses. Other programs include the agency’s 504 loans, which provide up to $5 million in long-term, fixed rate financing for major fixed assets.

While the SBA isn’t a direct lender in those programs, it does provide loan guarantees to participating third-party lenders.

Pugin emphasized that because the processes for winning federal work and securing financing to be able to perform it are complex, contractors should start both simultaneously.

“When you’re pursuing these contracts and trying to get the award, it is important to also be exploring how you’re going to get the capital to fill the award,” Pugin said. “The point of that is to pursue both paths in parallel.”

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