Summary: Getting a contract from the U.S. federal government has several advantages for small business owners. The government can provide your company with a steady flow of work if you know how to find it and bid for it. It can be an excellent source for projects that help you take your business to its next growth level.
However, government contracts can also be challenging, especially for a small company. In many cases, contracts can be large enough to drain most of your financial resources, leaving little money for other projects or expenses. Then, there is the wait for payment. Waiting 15 to 60 days can be a problem for government providers whose cash flow is tight because they are growing quickly. In this article, we discuss how to solve this problem. We cover:
- How does the government pay contractors?
- Receivables financing
- How does factoring work?
- Advantages of receivables factoring
- Who can get factoring?
- Conclusion
1. How does the government pay contractors?
Contract payment terms are stipulated in the Federal Acquisition Regulations (F.A.R.). The speed of payments usually depends on the size of the opportunity, the size of the contractor, the government agency, and urgency, among other criteria.
In general, the government tries to pay some small businesses within 15 days of invoicing. This quick turnaround can be very helpful to the small businesses that qualify for it. However, not every business or contract gets paid that quickly. Many companies often get paid on net-30 terms or longer. For these companies, slow payments can create a financial challenge.
There is little you can do about the speed at which the government pays its invoices. Like any large organization, the government moves and pays at its own speed. However, there is a way to handle this challenge and get funds quickly.
2. Receivables factoring accelerates your cash flow
You can solve the cash flow problems created by slow-paying government invoices by using financing. The type of financing you use depends on the size of your company and your track record in the industry.
Small government contractors should consider using factoring financing. This tool is specifically designed for small companies. It bridges the gap between delivering your product/service and getting paid.
Factoring provides the contractor with financing soon after they deliver their product/service and invoice the government. It provides funds to operate the business while waiting for the government to pay.
Unlike other solutions, factoring is available to most government contractors regardless of size. Factoring does not have the stringent qualification requirements that banks’ financing products have.
Note: An invoice cannot be financed until the product/service has been delivered to the government.
3. How does factoring work?
Factoring is simple to use and integrates with most small companies. Invoices are usually funded in two installments. The factoring company deposits the first installment to your bank account soon after you submit the invoices for processing. This installment covers 70% to 90% of the invoice value.
The factor deposits the second installment, less the cost for the service, soon after the government pays the invoice in full. This payment settles the transaction. This factoring process can be repeated as needed, which provides your company with ongoing financing. To learn more, read “How Does Factoring Work?“
Companies that invoice more than $200,000 should consider sales ledger financing. Sales ledger financing works like a receivables line of credit and is suited for more mature companies.
4. Advantages of factoring
Factoring receivables has a number of advantages over other solutions. The most important advantage is that it improves your cash flow quickly by funding your slow-paying invoices. Receivables factoring was created to solve this specific problem.
Additionally, factoring financing lines are flexible and can grow with your business. The most important requirement to increase the line is to have invoices from good-paying clients, such as the government.
Lastly, invoice factoring is easier to get than most other solutions. Many small businesses can qualify for funding if their accounts receivable are not encumbered and the business is well managed. Most factoring lines can be deployed in a week or two, though this time frame varies by federal contract and agency.
5. Who can get factoring?
In general, we can work with any contractor that provides a service or sells a product to the U.S. government or creditworthy companies. These include:
- Consultants
- I.T. specialists
- Product distributors
- Manufacturing companies
- Staffing services
- Security services
a) Do you work for prime contractors?
Factoring may still be an option if you work for a prime contractor. However, there is one important distinction. While the government is the end-customer, your actual customer is the prime contractor. Consequently, the transaction is considered a commercial factoring transaction rather than a government factoring transaction.
The qualification requirements for commercial factoring are virtually the same. Keep in mind that the prime contractor must have good commercial credit and pay you on net terms, regardless of when they get paid by the government.
6. Conclusion
Factoring is an excellent alternative for small companies that work on government projects but need to get paid quickly. The solution improves your cash flow by accelerating funds from slow-paying government receivables.
Want a factoring quote?
We are a leading provider of factoring services to government contractors. For an instant quote, use this form, Otherwise, call us toll-free at (877) 300 3258.