Some companies receive a good deal of work directly through the United States government in the form of contracts. Typically, businesses must compete against others to receive these lucrative and enviable jobs. Government contracts mean guaranteed, steady work at least for the length of the contract. However, with all of the great things associated with government contracts, there are drawbacks. One of the most glaring ones is that companies must have enough money to bankroll not only the particular jobs that have been assigned from the government, but they must also keep their business afloat while coming up with the operational costs that will be required to complete all of their work.
Because a company may not get paid for 30-60 days after the invoice has been sent to the government, this could take months without income on this one particular job. Sure, a company may have other projects or work but if they are smaller than the government job, the company may find itself unable to pay its bills. They could attempt to get a loan from a bank. This may or may not be possible.
If a company is fairly new, has an average-to-poor credit record or simply does not have the time to wait around and hopefully, get approved, this may not be a great option. Another option to consider is factoring their government contract receivables or invoices.
Factoring government contract receivables involves selling the incoming payment from the government program at a reduced price to a factoring company. For example, if the government owes a company $100,000 for a job already completed, they could sell it to a factor for $75,000. Therefore, instead of the company having to wait 30-60 days for payment, they could get it in a matter of 1-5 days. If they need money, this allows them to get it much faster.
After the company sells the invoice, the factor (company that purchased it) will go about collecting the payment from the government. Once they receive the entire balance of the invoice, there will be a reserve. The reserve is the difference between what they bought the invoice for and what it is actually worth. Considering the example above, if the invoice is worth $100,000 and the factor purchased it for $75,000, the reserve would be $25,000. The factor would return this money to the seller, minus the factor’s fees.
Factoring is a win-win for both parties. The seller gets badly needed cash and the factor makes money by providing the capital.
A company looking to sell their invoices should look for factoring companies that specialize in this industry. They should have the money and expertise to deal effectively with the Federal government.
New To Government Contract Factoring? – Start Here
Although doing business with the government is very rewarding, it can be challenging for new or growing companies. Here are some articles you may find useful in order to fully understand how government factoring and financing work and how they can help your business.