Government contracts are ideal business arrangements for many companies. They provide them with an opportunity to work with a trustworthy client that has deep pockets. Being able to secure a government contract is guaranteed work for at least a period. However, though many businesses would love to compete for an opportunity to work with the government, many don’t even try because they are afraid they won’t have the money to bankroll the job. PO (purchase order) financing and invoice factoring are both options which make it possible for companies, even those with small cash stores, to compete for government contracts.
PO financing is a way for businesses that require suppliers to be able to obtain whatever supplies they need to complete a job without spending any of their own money. As a result, even businesses that are cash poor can compete for jobs, secure them, fulfill them and bring in much needed capital. It can be difficult for businesses that need money to get more money because they aren’t able to afford the supplies and manpower necessary to secure and complete new jobs, that is unless they utilize purchase order financing. This sort of commercial financing can eliminate the aforementioned as a hurdle.
A factoring company will secure a line of credit for a business’s suppliers or pay cash for the supplies, allowing the company to take possession of them so that they can re-sell them or use the materials to manufacture a product, which they will then sell to an already secured customer. After the final sale, the factor will then be paid back the money they used to purchase the supplies plus a portion of the profits.
PO financing makes it possible for a company with a government contact to secure the materials it needs in order to complete the job even if they do not have a lot of available cash on-hand. This effectively levels the playing field between large and small businesses. This sort of financing is a good option for businesses of all sizes and can be used regardless of the credit history of the company or the amount of years it has been in operation.
Invoice factoring works in a similar manner, though there are some significant differences. In this form of financing, a company will sell their invoices or accounts receivables to a factor, who will purchase them at a discounted rate, generally for 10% to 30% less then they are worth. They will then collect on these invoices themselves, return the balance to the original invoice owners and then collect a fee. If a business used invoice factoring to finance a government contract, it would look something like the following:
After a government contract has been secured, the company would take the invoice to a factor, who would advance them the money for a portion of the total invoice. Because it is a government contract, it will likely be on the higher end, closer to 95% of the total invoice amount. The company could then use the monies to complete the job, i.e., buy materials, pay employee salaries, insurance, etc. After the job is completed, the factor will collect the invoice from the government. This money will then be handed over to the original company, minus the factor’s initial payment and fees. In summary, PO financing and invoice financing are both great ways to finance government contracts.