Does your company do business with the U.S. government? If so, you probably appreciate the regular work but you might also find it difficult to deal with the slow repayment periods. Since the government may take up to two months to pay its invoices getting enough capital to last through invoice periods can make the difference between staying in business or going under. One way to quickly increase your cash flow in between projects is to use government contract factoring.
Types of Government Contract Factoring
There are two types of factoring for government contractors: purchase order financing and invoice factoring. Purchase order financing allows you to get the supplies you need to fulfill an order even if you don't have access to the funds to pay for them yourself at the moment. Invoice factoring, on the other hand, allows you to sell the value of your submitted invoices to a third-party who then advances you most of the money so you can use the funds for business purposes right away.
Both financing options are interest-free and do not require you to open new lines of credit. Since these financial arrangements are not provided by traditional lenders you also won't need to pass a credit check to qualify for them. These options can be of real benefit to small businesses or those with poor credit histories, since banks may not agree to lend to these companies.
How Government Contract Factoring Works
If you decide to use purchase order financing you'll apply for it through a funding firm. The firm then looks at the validity of the purchase order and decides whether or not to grant the application. If you're working with the federal government it's likely that your PO financing request will be approved since the government will likely follow through with the order. The factoring company will then issue a letter of credit to your supplier. Then the supplier will send you the goods to complete the project. After you finish the work, submit your invoice, and receive payment, you'll send a portion of your income back to the factoring company to pay off the account.
Invoice factoring, though, works differently. With this arrangement, you'll sell your outstanding invoices to the factoring firm. The firm will advance you the bulk of the invoice value and begin collecting on the invoice on your behalf. Once the government pays off the invoice the factoring company will send you the rest of the money after deducting their fee.
Government contract factoring can help your business meet your expenses even when you're waiting for the government to pay off your invoices. By taking advantage of either purchase order financing or invoice factoring, you'll be able to stay in business, no matter how long it takes to receive your final payment.