Government Receivables Financing Enables Small Businesses to Bid on Big Business
Government receivables financing allow small companies is to bid on big jobs and grow their businesses. Often times, small companies are afraid to compete for larger contracts. This is often because they are doubtful that they have the financial strength to float large jobs. Because a company may not be paid until after they completed a service or delivered a product, they have to come up with operational expenses prior to beginning a new job. This can be quite costly and out of reach financially for small companies.
Hiring personnel, purchasing supplies and other related operational expenses can quickly add up. Bank financing is one option but is not one readily available to a small business. Because they are not able to come up with enough money to cover these expenses, they don’t even bother going after larger jobs. However, it is often necessary for small companies to secure bigger jobs in order to experience growth. Alternative methods must somehow be secured or a small company will always stay small and perhaps eventually go out of business. Government receivables financing is an excellent way for companies who have contracts with the federal, state and local governments to leverage these jobs for money which would allow them to qualify for bigger jobs.
Receivables factoring companies purchase the invoices of businesses at discounted rates. They provide these monies to companies in exchange for a small fee. This cash can be used for whatever a company deems necessary. Factors only work with companies that have clients with good credit histories. Because the government is considered a good credit risk, it is rather easy for companies to sell government receivable invoices for “instant” cash. The entire process takes only a matter of days, allowing companies to receive money extremely fast.
Aside from this type of financing (receivables financing), a bank loan is often times the only other viable option. For companies new in business or for those who do not have excellent credit, it can be very difficult to secure a bank loan. Even for businesses that do have very good or excellent credit, it still may take a matter of weeks before they are able to receive any money from a bank. Sometimes this is fine. However, other times it is not. A company may need money right away and a bank loan is not the quickest way to generate cash. Receivables financing, however, is.
Once a business has set up an account with a reputable factoring company, it is possible for them to receive money within 24 hours. This is incredibly fast and it allows companies to improve cash flow without taking on new debt.
After a Factor purchases a government invoice from a company, they will then collect on it. When they receive the monies, they hand them over to the company they originally purchased the invoics from, minus an agreed upon fee. The sooner the invoice is due, the cheaper the Factor’s fee generally will be. It is less expensive to sell an invoice that is due in 30 days then one which is due in 60.