Owning It: Small Business

The government track to a million-dollar business

With federal law dictating that the U.S. government award 23 percent of federal contracts to small business (that's roughly $80 billion to $90 billion each year for their products and services), landing agencies like the DoD, General Services Administration and the U.S. Army as clients can be extremely lucrative, even during recent years, when budgets were squeezed and the threat of government shutdown was a real risk.

Securing such contracts isn't easy, though. Months spent on paperwork, investigating credentials and writing faultless proposals don't guarantee work for companies that must compete with a pool of equally capable competitors. And federal agencies, which set aside a percentage of contracts for minority-, women- and service-disabled veteran-owned small businesses, almost always prefer to award the work to companies they've worked with previously.

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The government path to a significant revenue source won't be easy—yes, it's the government, so expect this business battle to include a fair share of bureaucracy.

"There is so much red tape, so much stuff I didn't know—it's a complete maze," said Kristen Nevils, co-founder and vice president of M.R. Crafts in Davie, Florida, a six-employee firm that won its first contract in 2009 and today makes roughly 50 percent of its revenue from supplying, reselling and sourcing maintenance, repair and operations products to VA hospitals in Florida and California. "There are so many companies that refuse [to work with the government] because it's so complicated."

For Royce Leather, a Secaucus, New Jersey, manufacturer of handmade wallets, bags and briefcases, it took more than a year to secure its first contract. On the risk side, "You never really know how profitable the opportunity is going to be, given the allocation of time and human capital you put into these bids," said CEO Andrew Royce Bauer. Three percent to 5 percent of his company's revenue comes from selling personalized leather journals and padfolios to the U.S. Senate. Royce is making "hundreds of thousands" of dollars selling to the federal government, and the company plans on increasing that business in time.

In an effort to ease the process, the government offers plenty of resources to help small businesses break into the contracting market.

Here are five key programs and services that can help a company procure federal contracts.

1. Free consulting

Federal contracts range in worth from thousands of dollars to millions, so established small firms have been known to hire consultants and devote entire teams to researching and preparing proposals for procuring federal work. But for most small companies—especially new ones—such resources cost too much money and time.

Companies can seek help from one of the U.S. Small Business Administration's (SBA) Small Business Development Centers (SBDCs)—there are roughly 900 sites in the U.S.—where companies receive free assistance in all aspects of business management.

The SBDCs help "at every stage of the process," said Jane Dowgwillo, the statewide government contracting manager at the SBDC at the University of West Florida. "Sitting down with them … and figuring out who's buying what, trying to find [which federal agency] might be a match for a firm's product or service."

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Dowgwillo's office recently worked with M.R. Crafts and The Rockhill Group—a Gulf Breeze, Florida-based provider of aviation services to the FAA, U.S. Air Force and Army—to develop effective strategies in bidding and marketing for government jobs. The Rockhill Group, which landed its first contract in 2005, almost exclusively works with the government today, juggling more than $72 million in government contracts.

The government also partially funds the 300 or so procurement technical assistance centers (PTACs), where the only focus is to help firms—at mostly no cost—sell to federal, state and local government via one-on-one sessions, seminars and matchmaking sessions. There are also "speed dating" sessions for small companies and government procurement officers.

2. Professional networking

In 2009, American Express OPEN launched OPEN for Government Contracts, a national initiative to help enable small companies to break into the federal contracting market. The SBA has since partnered with American Express OPEN, specifically to help woman-owned firms learn the ropes of procurement.

Free to any company, OPEN offers panel sessions held around the U.S., where small firms that have successfully navigated the federal contracts market offer advice and empathy to first-timers. Guests of honor include federal agencies' small-business liaisons; next month more than 1,000 small businesses are expected to attend a summit in Washington, D.C., where 40 government officials will offer tips on pitching to agencies.

"It's like the Cliff Notes of government contracting," said Lourdes Martin-Rosa, American Express OPEN advisor on government contracting. "We break it down, make it simple; we hand-hold them through and teach them what they need to know."

3. Loan guarantees

Many small firms may possess the core capabilities to perform the work called for on a major contract, but some aren't able to rapidly pull together the resources—manpower, usually—to carry out especially big jobs.

A loan, of course, would help, and the SBA 7(a) loan program can be used for both short- and long-term working-capital needs. While the SBA doesn't lend money directly to firms, it sets the guidelines for loans, which are made by its partners—banks, credit unions and other lenders.

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Recent data shows that larger-dollar-value small-business loans are the growth area. In the SBA 7(a) loan program, the number of deals for $150,000 or less declined from 25,485 in fiscal 2012 to 24,923 in fiscal 2013, and loan volume stayed relatively flat at $1.4 billion. The number of SBA 7(a) loans of $1 million or less rose in that same time period, from 40,496 to 41,694, with volume increasing from $7.6 billion to $8.5 billion.

4. Links to lucrative partnerships

As a somewhat easier way to build experience in the federal contracting market, experts suggest starting out with subcontracting—or partnering with a large corporation that holds the prime contract—to perform a piece of the job needed. Ridgewells, a D.C.-area catering company, is pulling in around $12 million in revenue from supplying Capitol Hill with its catering services, but it works under food giant Restaurant Associates, which holds the prime contract to provide all restaurant and food court needs. INADEV, a custom and mobile technology company, broke into the federal market through its relationship with Lockheed Martin.

M.R. Crafts found its largest source of business before growing on its own through a relationship with industrial-supply company Grainger. The company was also able to leverage the history of Michael Nevils, Army veteran-turned-inventor and co-founder of M.R. Crafts, in working with the Veterans' Business Outreach Center (VBOC) on strategies and research for winning federal contracts.

One way to jump-start subcontracting is to apply for a mentor-protégé program.

Many federal agencies, including the Department of Homeland Security, employ their own mentor-protégé program. The program encourages large prime contractors—AT&T, Boeing, Booz Allen and IBM in the past—to provide business-development assistance and foster long-term partnerships with small companies. Many of these partnerships result in joint ventures that allow the large and small firms to, as a team, pursue government set-asides for minority-, veteran- or women-owned businesses. These opportunities are limited.

"You may have a pool of 100 small businesses vying for that mentorship program, but they only choose two or three," said Cris Young, president of the National Association of Small Business Contractors/Supplier Council.

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The SBA has its own mentor-protégé program, but it's open only to 8(a) firms—or what's known as the HUBZone, through which the SBA assists businesses owned by socially and economically disadvantaged individuals (HUBZ stands for "historically underutilized business zones).

However, "[it's] not just a contracting tool," said John Shoraka, the SBA's associate administrator for government contracting and business development. "It's a business-development tool intended to have the small protégé benefit in some way, say, in technical expertise, management experience or overall financial wherewithal."

5. Certification for your company

One of the best strategies for firms looking to secure an SBA-backed loan or win federal contracts is to pursue certification for a specific type of business.

Federal agencies—as well as large corporations looking to farm out pieces of big contracts to subcontractors—set aside a small percentage of available jobs specifically for HUBZone-eligible companies; they'll likely get consideration for work before others and often won't have to go through the bidding process.

"Having two certifications really helps, because there are X number of aviation contracts, and suddenly the number [of contenders] gets smaller," said James Rockhill, a former Air Force fighter pilot and CEO of The Rockhill Group, which is classified as a service-disabled veteran-owned business as well as an 8(a). "Unfortunately, both of these processes were very cumbersome."

Certification also means more paperwork and months of waiting. "Our target time is 90 days, but what creates a lot of frustration … is that the 90-day clock doesn't start until we have a complete application," Shoraka said. "Sometimes we get partially completed ones and it has to go back and forth between our analyst and the applicant."

While Rockhill waited about two years to get his 8(a) certification. Ferhan Hamid, CEO of Tysons Corner, Virginia-based mobile and customer technology firm INADEV, said it took him one year to get his 8(a) certification. INADEV now has 10 federal contracts and annual revenue of $5 million to $10 million.

By Maggie Overfelt, special to CNBC.com