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Reasons Why Government Contracts Are Extremely Valuable During a Recession

Most economists believe a recession is coming within the next year. We’re overdue for a significant economic downturn anyway, and with inflation running hot, the Federal Reserve seems intent on crushing demand one way or another.

As the saying goes, don’t fight the Fed.

Recessions are bad for most businesses. Assuming yours isn’t one of the few “countercyclical” enterprises that actually benefits when times are tough, you can expect revenue to decline in the coming 12 to 18 months. You probably have an action plan to address this.

But how creative is that plan? How resilient does it make your business to a potentially severe, long-lasting downturn?

If you’re not thinking about how to open up new sources of revenue, rather than shore up existing streams, you could be setting your business up for a rough 2023.

One source of revenue that many businesses don’t consider — mainly because they don’t think it applies to them — is government contracting. Government contracts promise stable, predictable business income in good times, but they’re especially valuable during recessions, no matter what your business does.

Why Government Contracts Are Valuable in a Recession

Let’s take a look at why becoming a government contractor could give your business a significant advantage as the economy weakens.

Government Contracting Is Recession-Resistant

Government spending tends not to drop quickly during recessions, if at all.

This is most true at the federal level because the federal government doesn’t have to balance its budget — it can spend with borrowed money. States and local governments have to balance their budgets by law, but with most states running surpluses right now, most won’t feel pressure to slash spending at the first sign of a downturn.

The Government May Actually Spend More During a Recession

Looking back at the two most recent recessions, we see that the federal government actually increased spending via stimulus programs to support individuals and businesses. In addition, billions of dollars authorized by recent stimulus legislation remain to be allocated, and much is reserved for state and local governments to use as they see fit. It all adds up to a significant opportunity for new government contractors.

Local, State & Federal Agencies Buy Just About Everything

Government contracting is a good diversification strategy for businesses because governments buy just about everything. This includes products and services normally considered discretionary or individual facing, like prepared foods. If you’re not sure that any government contracts apply to you, check your state and local government websites for current RFPs — and prepare to be pleasantly surprised.

The Government Pays Its Bills

Sometimes slower than government contractors would like, sure, but it does pay. Government agencies generally pay invoices on net 30 or net 60 terms, meaning 30 to 60 days after receipt. And yes, they are good for the money — their funds are authorized by law and can’t be revoked because the people signing the checks feel like it.

That said, the government’s sometimes-pokey payment cycles can cause problems for small and midsize businesses that need to pay vendors or staff more quickly. But that’s easy to resolve by partnering with a capital provider like LEONID — a DoD Trusted Capital Provider that offers government contract financing and government contract factoring to help with short-term revenue gaps.

Companies like LEONID use clients’ government contracts to structure and size customized government contract financing solutions, typically with low to moderate leverage (50% to 75% LTV) and no personal guarantees. Clients don’t repay their loans until they get paid by the government, so there’s no double-dipping either.

Government Contracts Tend to Be Larger Than Private Contracts

Becoming certified as a government contractor and applying for government contracts requires many hours of work. This discourages smaller businesses from going through the trouble.

The upside: Government contracts tend to be larger than private procurements. Government agencies have deep pockets and are willing to spend more at a time to avoid redundant contracts or frequent vendor changes.

During a recession, just one or two large government contracts can make up for the loss of a half-dozen or more private contracts. This is good for cash flow if longtime clients suddenly run into financial trouble, as often occurs during a recession.

Protect Your Business From the Recession to Come — Or Not

The economy is notoriously difficult to predict. However, despite inflation at 40-year highs and mounting signs of economic weakness around the world, it’s possible that the United States will avoid an outright recession in the coming months.

But we shouldn’t bet on that. And even if a recession doesn’t happen soon, there’s no real downside to pursuing government contracts — with or without help from a government contract financing provider. The same strengths that make government contracting so rewarding in a recession also apply in boom times.