With over $500 billion in projects each year, being a government contractor is surely a lucrative business. However, payments for these contracts could take 30 to 90 days on average. But what if your business can’t wait that long for funds to arrive? Luckily, you have government contract factoring as an option.
But what is it and does it work for your business? In this post, we will discuss the basics of government factoring, how it works, and the potential challenges it could bring.
What is government contract factoring?
Government contract factoring, much like typical factoring services, allows you to get instant advances for your invoices. This is done by selling your eligible government invoices to a factoring company like Factoring Express.
Unlike loans, factoring advances up to 97% of your invoice’s total value for a small fee. From there, the factor will collect the outstanding invoices from respective government agencies.
This way, you’ll get the funds tied to your fulfilled government contracts immediately. You don’t have to go out-of-pocket with employee salaries, supplier payments, and other operational expenses. You’ll receive your much-needed capital without getting another debt or digging into your limited funds.
Overall, invoice factoring government contracts is a big help since they often involve lengthy payment cycles. For contractors like you, this traditional payment process can easily put a strain on your finances. This will prevent you from bidding on bigger projects or accommodating more clients in the long run.
With factoring, you can avoid all these problems. While you’ll pay a small fee, it’s a small investment to enjoy steady, predictable, and reliable cash flow.
How government contractor factoring works
The process of government contractor factoring is very straightforward. Here’s what you can expect when you partner with a factoring company:
Step 1. You complete the services or products.
First, you have to complete the services or products you’re providing. Take note that factors like us only accept invoices from completed work. Otherwise, we will have to wait until it’s fully accomplished before processing your application.
Step 2. Invoice creation.
After delivering all the services or products on the contract, the next step for you is to create an invoice. Make sure that the invoice has accurate information to prevent any payment delays.
Step 3. Sign up for an account
Next, you need to sign up for an account on our website. Simply fill out of the government invoice factoring form together with all the necessary documents. In most cases, we can approve your account on the same day.
Step 4. Start submitting invoices
After we approve your account, you can start sending us the government invoices you want to factor. Again, we only accept invoices for completed work with no existing liens.
Step 5. We verify your invoices.
Once we receive your government invoices, our team will verify them to the government agency’s portal or system. This is to ensure that your invoices have the correct information and are suitable for factoring.
Step 6. We send the cash advance
If everything is verified, we will send you up to 97% of your government invoice’s total value. Most of the time, we can fund your invoices within 24 to 48 hours.
Step 7. We collect your invoices.
While you enjoy your instant capital, our team will work closely with the involved government agency to collect the invoice. We conduct follow-ups and exhaust all means to collect the outstanding balance.
Step 8. We settle your remaining balance
Once we’ve collected your government invoice, we will send you the remaining balance from the invoice minus our service fee. Overall, this entire cycle repeats for every invoice you factor with us.
Why do government contractors use factoring?
Most government contractors are small to mid-sized businesses. Unlike big corporations, these companies can’t afford to wait weeks to months for payments to arrive. This is why they often partner with a factoring company. Here are more reasons why:
- Improved cash flow. Since government contracts can take up to 90 days to get paid, factoring services allow contractors like you to have a steady and improved cash flow. This way, you can avoid cash crunches that could compromise your entire business.
- Reduced payment delays. As we’ve mentioned, government agencies are notorious for their lengthy payment cycles. In this case, factoring services can bridge the gap, so contractors won’t have to wait for so long.
- Access to working capital. After fulfilling a government contract, your business needs to keep going regardless if you get paid right away or not. With factoring, you can access working capital to keep your business running.
- No personal guarantees or collateral. Unlike loans, factoring government invoices doesn’t require collateral or personal guarantees. Most of all, it will not slap you with hefty interest rates. You get to preserve your credit line and get zero liabilities added to your books.
- Fast processing. With factoring, you can receive cash advances within the day. Unlike bank loans or traditional payments that take weeks to arrive, factoring solutions is a faster option. You can use the instant funds while the factoring company handles the collections.
Rates and fees to expect when factoring government contracts
Each government factoring company will have its own pricing. It’s important that you inquire about this part before signing up for an account. This way, you can assess whether the pricing model suits your business:
Usually, factoring companies will have the following pricing models:
- Discount rate. With this setup, the factoring company will charge you a discount rate on the face value of the invoice. This rate is typically around 1% to 5%. At Factoring Express, we only charge 1.99%, which is one of the lowest in the industry.
- Origination fee. Take note that some companies may charge you with an origination fee. This is a fee that you pay when you first start the service to cover administrative costs. It can be around 1% to 3% of your invoice’s value. Good thing, we don’t charge any fee of this kind here at Factoring Express.
- Additional fees. Before you sign up, always ask for any other fees that you may have to pay. Some factors may charge fees for credit checks, wire transfers, and so on.
Potential challenges with government invoice factoring
Although factoring government invoices is convenient, it’s also important that you understand the potential challenges it could bring. Here are some of the issues that you may encounter:
- Contract eligibility. Not all government contracts you entered into are eligible for factoring. Take note that some government agencies may explicitly prohibit the involvement of a third party in collecting your invoices. It’s important that you check for this clause on your contract to avoid problems.
- Contract size limitations. Some factoring companies you may find could impose minimums or maximums on the invoices you can factor. With Factoring Express, you don’t have to worry about this problem. We don’t have minimums or limits to the invoice sizes you can factor.
- Impact on relationships with government agencies. Another thing you should think of is how factoring will affect your partnership with government agencies. It’s because factoring requires you to disclose financial information to the factor, which some agencies will not permit.
- Limited control over collections. Since the factoring company will take over the collections, you don’t have control over the process. While it can reduce your administrative burdens, it can also be detrimental if you don’t choose the right factor. This is why you should only partner with factors with experience in government contracts.
Alternatives to government factoring
For the most part, government invoice factoring is suitable for most contractors. However, there are some instances where it’s not the best solution. In that case, you can explore these alternatives instead:
- Business lines of credit. You can take a loan to get your much-needed funds to keep your business afloat while waiting for government payments. Just make sure that you carefully assess the interest rates and terms of payments before signing up.
- Government financing programs. Some government agencies offer financing programs specifically designed for contractors. Through this, you can receive funding with reasonable terms, so you can have a working capital while waiting for payments.
- Invoice financing. Invoice financing is somewhat similar to factoring. In this setup, you use your outstanding invoice as collateral to secure a loan from a bank or lender. Just note that you’re still responsible for collecting your invoices if you opt for financing.
Delayed payments don’t have to compromise your business as a government contractor. Although government agencies take time to pay completed contracts, you always have factoring as an option.
Through factoring, you can get instant funding on your invoices without the need for another loan. Also, the process is fast and easy, with the funds reaching your bank account in as fast as 24 hours. Simply sign up for an account, get approved, and send us the invoices you want to factor.
If you want to know how government factoring can help your business, don’t hesitate to contact us at Factoring Express. Let’s discuss your government contracts and how our funding can grow your business!