Guide to Contracting
Landing a contract with another company can help your business grow and get wider distribution for your products or services. However, getting those contracts can be tougher than you might think, and often times business owners may never learn why they were passed up for a contract they tried to win. There is a lot that goes on behind the scenes when a business is deciding which company it should contract with, but fortunately, there are ways to help influence how your business is perceived during this crucial time.
Before you begin to position your company for contracting, it is important to understand the fundamentals of the process and to consider consulting with an attorney prior to entering into or negotiating a contract. In its most basic state, a contract is a formal and legally binding agreement. Whether written or verbal, a contract must have four elements: an offer, an acceptance, an intention to create a legal relationship, and a consideration (often monetary).
In the world of business, contracts are most often used by three parties to manage relationships: purchasers, suppliers, and partners. The parties involved, which can range from small business enterprises to the federal government, work together to establish clearly defined terms and conditions. The agreements that purchasers, suppliers and partners arrange may vary – below are a few examples:
- Leasing Agreements
- Receiving & Quoting
- Borrowing Money
- Engaging Independent Contractors
- Renting Equipment
- Tendering & Quoting
- Credit Agreements
- Strategic Alliances
- Joint Ventures
- Franchise Agreements
- Dealership/Distributor Agreements
Types of Contracting
Many corporations have supplier diversity programs (view a list of Fortune 500 supplier programs here), but since these corporations are often large businesses, they usually have high standards for the companies they contract with. The benefits of a corporate supplier contract can be enormous, but getting one can be tough. Getting your business certified can help, and so can having strong business credit. Many large corporations check a business’s credit file before deciding whether or not to bring it into the supply chain. Being able to show that your business isn’t likely to go bankrupt or to deliver late on terms can be an asset when applying for contracts. You may also want to monitor trends around supplier and supplier diversity issues to help keep your business at the cutting edge of corporate contracting.
Getting your product into stores, especially big-box stores that often require certain business credit scores and ratings, can be a challenge. But contracts like these can help grow your business in leaps and bounds, as well as help make your brand recognizable. Getting in front of more consumers can be key to running a successful retail business. Billy Westbrook, creator of the premium wiper blade Scrubbleblade, learned just how challenging retail contracts can be while trying to grow his business. After taking action to help impact his business credit file, he was able to land contracts with some of the nation’s largest retailers. “I heard when I started my company that a D&B D-U-N-S® Number and good business credit were important. Little did I know, they’d help us land an account with one of the largest retailers in the world.” Learn more from Westbrook below.
Manufacturers, like suppliers, are often part of a chain, and a chain is only as strong as its weakest link. In order to get contracts as a manufacturer, it can be beneficial to provide evidence that your business won’t be the weak link in a supply chain. Building and monitoring your business credit file is a simple way to help portray your company in the best possible light. Custom Powder Systems used its business credit file to help show Fortune 500 companies that the company could deliver on contracts and this helped it grow its business. Hear the full story:
Construction businesses do most of their work through contracts, and winning bids consistently can be the difference between a successful business and a failing one. In order to win a contract, the business will usually have to prove it can do several things, including complete the project on time, do the best work for the best price, and meet all legal guidelines and codes. Past work can be a great indicator to a prospect that a business will do great work, but business credit can be a great indicator of whether the business will meet deadlines, pay workers on time, and stay in business long enough to complete the project. Bjork Construction learned first hand how the company’s business credit file could help impact success and used the company’s file to help grow the business and get new clients. Learn more:
Government contracting can be a very lucrative and competitive marketplace for businesses of all shapes and sizes. With contracts available on both the state and federal level, there is much to learn and be prepared for. Diversity or other certifications can help a business win government contracts, and having a D&B D-U-N-S® Number is required for these types of contracts. Mastering GSA schedules can also be helpful when searching for government contracts that are right for your business, and having a strong capabilities statement can help your business be considered for more or future contracts.
Because government contracting can be so competitive, many business owners have started to use capabilities statements as a tool to help showcase their companies. As the marketplace becomes increasingly muddled with business cards, emails, and complicated business descriptions, a capabilities statement can help distill the most important company information in a clear and concise manner, so that it is easily accessible to clients and customers.
Critical Contracting Questions
Regardless of the type of contract you’re interested in pursuing, it is important you ask yourself these questions prior to coming to an agreement (remember to consult with an attorney when negotiating or drafting agreements):
- Does the contract meet your business objectives?
- What do you want out of the relationship? What does the other party want?
- Does the relationship present any potential risk? If so, who bears it?
- Are your expectations clear to the other party? Do you understand each other’s needs?
- What are the chances something goes wrong?
Answering these questions can help identify and clarify objectives, and can mitigate any risk associated with contracting.
How Business Credit Affects Contracting
Going into business with another company can turn out to be a really good investment or a really bad one. The consequences of entering an agreement with another company don’t have to be ambiguous, however. A D&B D-U-N-S® Number can be used to establish a business credit file, which can help create transparency and build credibility, and having favorable D&B scores and ratings in your business credit profile may help you land contracts.
It can be a good idea to mitigate risk before entering a contract by checking your potential partner’s D&B business credit report. The information in the report can help highlight the company’s past transaction and fulfillment history, and help indicate if your potential partner is likely to deliver or pay its lenders on time. In addition, a business credit report can help predict the likelihood that a business will cease operations in the foreseeable future.
Because many businesses can perform a background check on your business before signing on the dotted line, managing your D&B business credit profile can be especially important, particularly if your business is competing for contracts. Your business credit report can be a factor in helping you frame your business as successful and trustworthy, and your company’s business credit profile can be one of the most significant components of demonstrating its credibility. Your business credit file may be a deciding factor for your potential partners as they consider your bid – a positive portfolio may help you win a contract.
Furthermore, there are many other reasons your business credit report can be important for you as a contract-reliant company, as outlined below:
Some companies require that you have bonded insurance in order to work with them. For some insurance companies, you must maintain your D&B scores and ratings within a certain threshold in order to keep your policy active.
Terms & Conditions
When negotiating terms and conditions, some suppliers have leveraged their good business credit profile to get paid on a more favorable schedule than initially offered.
Access to Capital
If your customers experience financial distress and you are unable to collect on your receivables in a timely manner, you may need to access capital quickly in order keep your business running and meet expenses while you’re waiting to be paid. Some lenders require that your D&B scores and ratings be within a certain threshold before they will consider your loan application.
Subcontracting & Supply Chains
If you’re a small business and are interested in subcontracting or becoming part of the supply chain, monitoring and influencing your business credit report and credibility can sometimes be more important than it would be for a large business. Small businesses usually do not have an established reputation, so a strong credit profile can be more impressive when companies they are trying to partner with are comparing them to other small businesses.
Want to learn more about how business credit can affect your business? Check out our ultimate guide to business credit.
Ready for the next step in generating larger contracts?
Photo Credit: NAO, Twenty20
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