How To Factor Your Government Contract Receivables

Government contracts can be a cash cow for many businesses. They are guaranteed, continuous work at least for the length of the contract. Plus, once a business learns how the government contract process works, they can land project after project. There are drawbacks that businesses need to be aware of. One of the most challenging ones is having the cash flow to leverage throughout the entire job. Companies must have enough money to bankroll not only the particular jobs that have been assigned from the government, but they must also keep their business afloat while coming up with the operational costs that will be required to complete all of their work.

A business may not get paid for several months after the invoice has been submitted to the government. Meaning months can go by without any cash from that job. Larger companies will have an easier time getting through this process, but the smaller companies may themselves unable to pay its bills. A bank loan in today’s economy often is not possible. An alternative for the small business to consider is factoring their government contract accounts receivables or invoices.

Factoring government contract receivables means selling the eventual payment at a lowered price to a factor. For example, if the small business is owed $200,000 for a project already completed, they could sell it to a factoring company for $175,000. This allows the company to get their payment in a matter of 1-5 days instead of the lengthy waiting period 30-60 days.

The factoring company then becomes the bill collector. They will go about collecting the payment from the government. Once the factoring receives the total balance of the invoice, there will be a reserve. The reserve is the difference between what they bought the invoice for and what it is actually worth. If the invoice is worth $200,000 and the factor purchased it for $175,000, the reserve would be $25,000. The factor would return this money to the seller, minus the factor's fees.

Factoring can be the perfect solution for small businesses looking to land Government contracts and retain their cash flow throughout the process.