In many cases, small businesses struggle to make it even when they get paid on time.  And sometimes large primes abuse the small guys by holding up payments for 45 days or more. Other times, due to clerical errors, the government takes months to pay.

Small companies can be primes, too.  And in the cases where the small guy is the prime, the sub may be a large company or it may be another small company.  If the sub is a small company, it may not have the resources to float for 30 days or more, let alone if the terms with the prime were “paid when get paid.”  It is not the prime contractor’s responsibility to finance a small sub’s payroll.  It IS the prime’s responsibility to vet all potential partners.  A prime—large or small—should vet all potential subs/partners to be sure they have at least 90 days worth of working capital.  A number of the large primes do perform due diligence on small companies to ensure that a small business has appropriate resources/financing so it doesn’t go out of business.  Prime contractors aren’t banks.

The government has the Prompt Payment Act, whereas they are to pay a small business within 30 days of ACCEPTANCE of an invoice or owe you interest (remember acceptance of an invoice can be well over 30 days from the start of a job).  There isn’t a rule to govern prime contractors.  However, if a prime is abusing the situation and holding up payment, a sub can go directly to the government to receive payment.

Small businesses have the power to negotiate net 15 terms and the ability to bill twice per month.  Often times, the small business’ customer will want something in return, such as a discount.  Even if a company is paid “on time,” every business needs to have a line of credit or a stockpile of funds to make payroll, pay vendors, and keep the business running while it’s waiting to get paid (or simply for emergencies).

I’ve had small business customers float 90-plus days as prime contractors to the government.  Even if these companies enforced the Prompt Payment Act, they’d receive the interest AFTER they’ve had to come up with the working capital to cover operating expenses in the meantime.  EFT and ACH, along with electronic invoicing on Wide Area Work Flow for DoD contracts help companies get paid quicker.  I hear time and time again from primes that subs don’t invoice properly or on time.  Invoicing correctly and in a timely fashion would help small companies to get paid quicker.  The keys to getting paid by the government are to plan ahead for payment lags and to understand the A/P process of your customer.

Amy Horn’s worked with government contractors finance for the last 8 years.  She’s currently VP / Director of Marketing at Action Capital, a specialty finance company that lends to government contractors.

Contact info: 800.525.7767 or amy@actioncapital.com