For small businesses, winning a coveted government contract can be a great opportunity to boost their business prospects. However, for those who have actually worked with the government, they know it can be a double-edged sword as the wheels of a bureaucratic leviathan tend to turn much more slowly than private industry. Government contracts often involve a big commitment to internal resources which, if not matched quickly with sufficient inflows, can be financially devastating. Suddenly, the prospects of adding new business or even sustaining current levels of production can grow very dim for small businesses relying on government contracts. Therefore factoring government receivables is a quick and viable option to avoiding these pitfalls.
The Financial Challenges of Government Contract Work
In the realm of government contracting, small- and medium-sized enterprises (SMEs) have a huge mountain to climb to win a contract. The competitive nature of bidding on government contracts means businesses are going to be operating on very thin profit margins at best. Even before submitting their bid, companies have to upgrade their operations management and accounting practices to meet strict government compliance requirements. If they win the contract they must ramp up quickly – buying materials, adding workers and sometimes upgrading equipment – all out of current cash flow or by borrowing if they can.
Once the project is completed, or a project milestone is reached, they can invoice the government. At best, they get paid in 30 days, but more typical of government procurement procedures is 60 days. However if the government decides to audit the business and the project to ensure it is meeting its compliance requirements, the business could wait another 30 to 60 days. Either way, the business is likely to wait an extended period of time to receive payment for costs they incurred several months before.
Meanwhile, payroll has to be met and overhead expenses paid; and, typical of many SMEs, the long wait for payment precludes taking on any new business because it requires capital to do so. It can become a vicious cycle that gradually degrades the ability of the business to operate efficiently, much less prepare for growth.
Factoring Government Receivables
Many SMEs will find that traditional lending sources are not viable options because of their strict lending requirements. Businesses without a lengthy operations history or solid credit are not candidates for bank lending. Even if they are, bank products are not ideally suited for the short-term needs of a business that simply has to fill the cash flow gap created by slow payments.
That is what invoice financing is specifically designed to do – solving for a business’ immediate cash needs without locking it into rigid terms it can’t afford. Invoice factoring has been an effective capital source for small businesses for hundreds of years, providing them with the cash they are owed in a matter of days rather than months. To this day, it is the optimum solution for any business that needs to gain more control over its cash flow.
The Simplicity of Factoring Government Receivables Contractors
The appeal of accounts receivables factoring is its simplicity. Receivables factoring is a straightforward transaction in which a factoring company purchases the invoices of a business. The factor advances up to 80% of the value of the invoices in cash while the factoring company pursues the payment.
A business with a cash flow problem today can have it solved within a matter of days following an effortless process:
- Once an invoice for a completed government contract job has been submitted to the customer, a copy is submitted to the factoring company.
- The factoring company reviews the invoice for value provided and then pays the business up to 80-95% of the collectible value of the invoice.
- The cash is direct deposited in the business’ bank account within two to three days.
- The rest is held in reserve as a cushion against any billing discrepancies.
- The factoring company pursues the payment under the original terms of the invoice (i.e., 30, 60, 90 days), and takes risk of the invoice not being paid.
- When payment is received, the factoring company pays the balance of the invoice to the business less a fee.
When the need arises again, the process is simply repeated with no limit on the amount of invoices submitted or the amount of cash that can be advanced. Invoice financing is that simple.
The Many Benefits of Factoring Government Receivables
From the moment a business begins a factoring relationship the benefits continue throughout the process:
- Because the factoring company relies on the creditworthiness of billed customers, SMEs can qualify for invoice factoring.
- With invoice factoring, the business does not have to take on debt or add payment obligations.
- Invoice financing enables SMEs to smooth out their cash flow for more effective financial management.
- With a reliable and continuous source of capital, businesses can confidently bid on new projects.
- Factoring is scalable – as sales grow, so too can the amount of advances.
- SMEs can spend their time and energy focused on building their business by working with a factor.
Working with the government can be a great opportunity for SMEs, but it can present challenges. Especially for businesses relying on steady cash flow. Factoring government receivables is the optimum solution to accelerate cash flow. Any business owner working with governments should establish a factoring relationship. It is a crucial part of the financial management process. However before you proceed with invoice financing, you should consider all other small business funding options including purchase order financing and cash flow lending.