Factoring government receivables has been available for many years. Although small/medium businesses may not be as knowledgeable about factoring or accounts receivable financing it is still available to them. Factoring has become more common place since more small/medium sized businesses have been proactively going after the huge market of government spending. Since the passage of the Assignment of Claims Act the government endorses factoring. The act gives contractors the ability to assign invoices to a third party.
Understanding factoring
Factoring is a commercial funding strategy in which a business sells all or some of its invoices in order to provide a steady, predictable cash flow. The invoices are sold at a modest discount similar to the discount offered by vendors to their customers for cash or quick payment.
Who can qualify for factoring
Any contractor working directly for the government or that is working for a prime contractor. A factoring company may review the invoices of the company that is selling their invoices but the decision is based on credit of the account debtor.
Benefits of factoring
There are many benefits for government contractors to factor their invoices:
- Improved cash flow
- Quick turnaround
- Supports the growth of the contractor
- Can see at a glance what is outstanding
- Collection services if needed
- Advance rates from 80% – 90%
- Reserves released weekly or bi-weekly
Once you decide to sell your invoices, you need to talk to several factoring companies. Factoring is not one-size fits all. Each factoring company has its own requirements on the deals that it will fund. For example, some factors will only fund large invoices and others smaller invoices. Or there could be a component in the contract that the factor will not fund such as construction.
Before signing a contract one should understand what the terms and conditions are regarding the contract. How long will you have to work with this company? Will you have to sell every invoice or commit every contract? Once you understand the terms, conditions and cost, you will have a much better experience with factoring. Remember, factoring is a tool you use to help your cash flow dependable.
