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Something Small Biz Could Love: Risk Help From DoD

Posted by Robert Berman on

If all you need is love, then every small business in America would be gearing up for its first government contract. No one gets more public love from more political and media figures than small business.

But most small business owners, while they appreciate the love, never get that first government contract. It does not have to be that way.

The latest love-in for small business took place recently at a congressional hearing in Washington. The subject was, why the Defense Department did not — could not — hire more small businesses.

The hearing began with all the usual protestations of love for the small business owner. Once that was out of the way, industry and public officials explained that most small business owners — however fit they are to pay taxes for public work — are not actually qualified to do it.

Not because they cannot paint a barracks or fix the plumbing. But because they do not have the credit.

Many are surprised when they learn it takes credit to do a government job.

Here’s why: If the Defense Department has a $300,000 paint job on a base in San Diego, the bidders need at least $300,000 in cash and credit before they can be considered for the work.

The contractor has to pay for all the materials and labor and bonding long before the first dollar comes in. Banks used to supply working capital based on a government contract.

Not anymore. Not since the financial tsunami of 2008 took most banks out of the lending business.

Bonding is even more more onerous than the lack of working capital.

A bond, of course, ensures that if a contractor does not finish the job or pay his vendors, the bonding company will.

To the public official, that looks like insurance. But to the contractor and the surety company, bonding is credit: If the bonding company is not satisfied that you can make good on the amount they might have to put out to finish the job, they will not issue your bond.

To get a bond, most most bonding companies want to know just one thing: your credit score. Today, most small contractors just don’t have it so they do not even bid for public work because they cannot get a bond.

Or, as a trade group representative told Congress so blithely: “There’s a direct connection between a contractor’s capability and its bondability.”

That, of course, is really more of a self-fulfilling prophecy than a statement of fact. And it is killing small businesses by the tens of thousands around the country.

This is what President Obama was talking about when he said shovel-ready projects were not as shovel-ready as he thought.

Committee members and administration officials nibbled around the edges of a solution: Make public contracts smaller, so more people will have the credit they need to qualify.

That’s a partial solution, at best.

When I was a teenager, I sat at the kitchen table with my father, a contractor, when his bonding agent told him he did not have the credit to compete for bigger work.

Today the situation is far worse.

Here’s an example: For 30 years, Joe’s New York painting company was known for the quality work that he always finished on-time and under budget. Always. We checked.

Joe turned the company over to his family, went to Florida, and between rounds of golf, took a flier on some Florida real estate. When it went South, so did Joe’s credit score.

When he returned to his business, his private clients were gone, but his public clients were eager to have him back. But Joe could not get a bond for his painting work because of bad luck with real estate. And more than a dozen bonding companies told him so.

If you ask what missing a few payments on a Florida condo has to do with painting a New York army base, you got it: Absolutely nothing.

We do not have to write off an entire generation of small contractors because their credit is less than perfect. We can put them back to work, create jobs and lower the cost of public projects.

If the Defense Department can figure out a way to deliver millions of dollars in suitcases to Afghan tribal chieftains, surely government at all levels can find better ways to manage the risk from small contractors doing government work.

Now that would be something to love.

Robert Berman is co-founder of Cinium Financial. The company writes bonds and issues working capital to small contractors whose credit rating prevents them from bidding on public work.

What do you think?