Factoring Financing For Government Contractors
Government contractors that fear not having enough money to actually fulfill their contracts will be relieved to know that there is a way for them to get the money they need without borrowing it.
Many government contractors, both large and small, depend on bank financing in order to raise the capital they need to pay for personnel and whatever materials are required to complete the contracts they have won from the government. Going after these contracts is hard work and requires that the company best some stiff competition. Completing this process only to face the prospect of not being able to fulfill it due to a lack of funds can be disheartening and frightening. Factoring financing can be an excellent working capital solution.
Factoring financing is a way to raise capital really quickly, in fact within three to seven working days in most cases. A company will then be given a 80-90% of their outstanding invoices by a factoring company that purchases the invoices at a discounted rate. For those unfamiliar with factoring financing, this article will provide a brief education and introduction.
A factoring company purchases a company’s invoices at a discounted rate. These invoices will often be for goods or services that a company has already completed or have a contract to complete. For example, in the case of the government contractor, a business may have a contract with the government to provide $50,000 worth of goods in which they will be paid 30 days after delivery. A factor would purchase that invoice from the company for between 70% and 90% of full value of the invoice. That would be for between $35,000 and the $45,000, which will be paid to the contractor. This money might go towards hiring employees or to pay for materials prior to starting the job. Making it so, the company does not have to wait until the job is completed. This can take a huge load off of a business.
Having to cover the costs associated with a job before getting paid by the client can result in a company becoming cash poor. This can prevent them from completing the job or taking on other jobs. In some cases, it can even force them to go out of business, all terrible scenarios.
After the factor purchases the invoice they will then collect on it. This money will then go the company that originally owned the invoices. The factor does not keep these monies but instead is paid a fee that is agreed upon early in the process and prior to signing the contract. The fee will be dependent on a number of things, including but not limited to, the invoice holders credit history and age of the invoice. For example, a factor will generally be willing to pay more for an invoice that will be due in 30 days then one that will be due in 60 days.
A factoring company will only be willing to work with a business if their clients have good credit. This is because the only way they get repaid is if there are able to successfully collect on those invoices. A company that has customers with bad credit is too risky for a factor to take on.