What Is Government Contract Financing & How Does It Work?
It can be hard for small business owners to secure a large government contract. But once you do obtain it, the challenges aren’t over. While you are working on the project, you have to expend significant costs on personnel and cover fixed overhead expenses. However, it can take at least one to two months before you receive payment from the government. If you are working on an expensive contract, paying all your expenses in the interim may appear a daunting prospect. But government contract financing was created for this very scenario. It helps contractors fund operational costs for their government contracts before they receive final payment. In this situation, there are several types of financing which offer flexibility and fast access to liquidity for persons involved in government contracting.
Accounts Receivable Factoring
One government contract financing option is known as accounts receivable financing and involves a process called factoring. With this option, the contracting company completes the project and then sells their government invoices at a discounted rate to a factoring company. That way, the contactor gets money to fund their operations during the one or two months it takes to receive cash from the government. The factoring company, meanwhile, is responsible for obtaining the full amount of the invoice from the government as quickly as possible. One this money is received, the factoring company will take the percentage of the money that they had lent the contractor, plus a service fee, while refunding the remainder to the contracting business. The advantages of this approach include flexibility, the ability to meet sudden demands, fast access to cash, and the ability to focus on your primary operations while another company takes care of the collection process.
Asset-based lending is another way for a contracting business to gain financing without giving up equity in the company. Asset-based lending offers lines of credit based on a business’ eligible accounts receivable, equipment or inventory. This option is flexible, allowing you to customize the loan to meet your specific needs. If you need to make payroll, buy extra equipment, or fund other overhead expenses as you’re waiting to receive payment from the government, asset-based lending may be right for you.
Getting a government contract is an accomplishment to be proud of. You’ve worked hard to get the job and now you’re ready to start work. If you’re like many small business owners, you’ll find yourself facing significant operational costs before you receive payment from the government. But government contract financing offers options to keep your business humming along while you wait for final compensation.
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