Use Factoring To Finance Your Government Contracts
You may be unfamiliar with the term “factoring.” It is a commercial financing transaction where you can leverage finished work to gain badly needed working capital to grow the company and pay bills. Also known as Invoice Factoring, the benefit is in the simplicity of its mechanics. A company does work for their customer and sends them the bill, commonly known as the invoice. This obligation to pay is really a loan from the company to the customer, who owes them the payment.
What the factoring company does is use those “loans” or account receivables as the collateral for making advances to their clients. The company does the work and is owed, the factor pays the company and waits for the payment on the finished work from the customer. This allows the company to put funds back to work, paying for payroll or more supplies to fill more orders. In some instances, the ability to keep cash flow going smoothly is what allows a contractor to accept bigger contracts opportunities.
If you are thinking about using factoring for working capital you need to have access to the borrowing collateral. This means existing loans with secured creditors will need to be paid to release the security position on the receivables. Additionally, though a you might not have heard of factoring, it is a well established and recognized financing tool, and as such it is transparent to all parties. As a government prime contractor a provision to your contract called the Notice of Assignment has to be accepted by your contract officer. FAR guidelines clear the way to the CO to accept the NOA.
A few added benefits to factoring for working capital;
- Funding based on credit of customer (govt) not the borrower (you)
- Takes only days and minimal paperwork to set up
- Off-balance sheet, no long term liability on the balance sheet
- Free to use of funds for any business necessity
- Factor takes no position on equity or ownership
- Line grows with the company, unlimited growth ceiling
Please feel free to contact me with any questions or concerns you may have about this widely used solution for financing an emerging growth company.