What is Government Contract Financing?
Government contract financing can be a very effective way for companies to fund the operational costs associated with doing business with the Federal government. Every year, the U.S. government assigns contracts to private businesses throughout the United States.
They are available for both small and large businesses.
While it can be a great feeling to be awarded a government contract, it can also be quite expensive to complete assigned jobs. Some companies will struggle to cover operational costs of a particular project and still fund other projects and jobs.
Working capital problems can occur which can paralyze the company. There may not be enough to pay personnel and also cover expenses. One way for a company to get the cash that they need is to sell their government contract invoices to a factoring company.
After a company has finished a government contract job, they will prepare and send an invoice. The government may not pay right away. In fact, it could take 1-2 months before they send payment. In the meantime, the company will be out of the money that went towards operational expenses to complete the job. Without any income directly from this job, the company could be cash poor. For a large company with a good deal of income, this may be a bit inconvenient but it won’t put their company at risk or cause them to be unable to fulfill other commitments or jobs.
However, for smaller businesses, having to wait 1-2 months to get paid for an expensive job, this could effectively shut down their operations, making it impossible to generate any other additional income. Government contract factoring gives them a way to get the money they need to sustain their business.
This type of factoring sells the invoice of completed government contract jobs. A company would be effectively selling incoming monies. The factor, or the company that buys the government contract invoice, will handle collecting the money. This might involve them sending the government written correspondence or calling them over the phone.
The invoice is sold at a discounted rate. For example, a seller may require that the factor funds them 92% of the amount billed on invoice. Once the factor can collect all of the money, they will give the remaining, in this case, 10% back to the seller. However, the seller won’t see all of this because the factor typically charges a few points to cover their services.
A company that has won and completed a government contract may be willing to sell the invoice from the job to get cash needed to continue fulfilling the contract. If a company needs money after a completed government contract and can’t wait 30-60 days to receive payment, they may be willing to sell the invoice to a factoring company to get money right away.