How Government Invoice Factoring Works
The government contract factoring process works very similarly to factoring in most other industries. The primary difference is that the invoices that are sold must be collected from the Federal government. Businesses will find that not all factoring companies will purchase these types of invoices. This may be because they don’t have the expertise or don’t want to work low volume accounts, which government contracts tend to offer. However, there are some expert factoring companies that will buy government contract invoices. A company may just have to do a little more work to find them.
The government will contract out some of its work to companies in the community. This allows them to quickly get needed tasks and jobs done without having to hire personnel and train them. Government contracts have been quite lucrative and steady work for some contractors. Problems can arise for these contractors when many of their resources, go toward performing a job for the Federal government for which they haven’t yet been paid.
For example, the government may agree to pay a distributor $1,000,000 for selling merchandise to one of the government agencies. It may cost the distributor that bid on the job $700,000 to hire workers, cover production costs, transportation and the like. The distributor will be working with no advance. Once the job is finished, the company may have to wait 30-60 days for payment.
During that time, the company cannot purchase materials for more orders, meet payroll, or other basic operating expenses.
Therefore, if they have an opportunity for another contract/job, they may not be able to compete for it because they don’t have the funds. One way to remedy this is to sell the government contract invoice to a factoring company and use this money to cover costs or to take on new jobs.
The company that buys the government invoices will be essentially fronting the seller the money, giving them money to spend. They will purchase the invoice for a discounted amount and then will begin collections from the government. After they have collected the full balance, they will give the balance to the seller, minus factoring fees.
It is often costly for companies to fulfill government contracts even though these contract jobs tend to pay well. However, they can sap most companies of cash on hand. For companies that need to quickly re-fill their cash stores, factoring those government contract invoices is a great option. The company (seller) gets back some of the operating capital that was likely depleted when initially fulfilling the government contract.
These monies can be used to pay workers and to cover overhead expenses. Businesses will also be able to compete for new jobs and complete ones already in the queue. This allows them to continue to function instead of having to pause operations while they are waiting to be paid by the United States government.