How PO Financing and Invoice Factoring Benefit Government Contractors
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. For at least a period, being able to secure a government contract is guaranteed. However, though many businesses would love to compete for an opportunity to work with the government, many don’t even try. Companies are afraid that they will not 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 money. As a result, even companies 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 are not 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 those above as a hurdle.
A factoring company will secure a line of credit for a business’s suppliers or pay cash for the supplies. This allows the company to take possession of them so that they can re-sell them or use the materials to manufacture a product. They will then sell the product 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 contract to secure the materials it needs to complete the job, even if they do not have much available cash-on-hand. This effectively levels the playing field between large and small businesses. This sort of financing is an excellent option for businesses of all sizes. Regardless of credit history or the number of years it has been in operation, it can be used.
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. The factor will purchase them at a discounted rate, generally for 10% to 30% less then they are worth. They will then collect these invoices themselves, return the balance to the original invoice owners, and then receive 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 for a factor. The factor 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. This is closer to 90% of the total invoice amount. The company could then use the monies to complete the job, i.e., buy materials, pay employee salaries, insurance, and more. 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.