Bidding for government contracts can be both an exciting and rewarding experience for your business. Government agencies need to purchase goods or services, and your business has the means to supply them. But being awarded or bidding on government contracts can lead to certain financial challenges for contractors if they don’t have sufficient liquidity on-hand. As a result, contractors may face certain obstacles such as:
Lacking sufficient cash flow
Many contractors find themselves placed on credit terms of 30, 60, or 90+ days; leading to extensive gaps in cash flow and increasing accounts receivables.
Missed opportunities for growth
Without the upfront capital needed to take on larger orders, contractors may not be able to bid on or fulfill them, thus missing out on additional revenue and opportunities to continue to grow their business.
Typically a line of credit would seem like the right solution; however, not every business can qualify for traditional bank financing. Fortunately, several other options are available to consider, one of which is called “contract financing.”
What is Contract Financing?
Contract financing, more commonly known as “factoring” or “invoice financing,” is a form of financing often used by government contractors to access cash trapped in outstanding invoices or accounts receivable. In simplest terms, contract financing helps businesses get paid faster by turning their unpaid invoices or purchase orders into cash flow.
What makes it an appealing option is that invoice financing companies, known as “factors”, rely on a contractor’s customers to get paid. Because state and federal governments make reliable debtors, the factor can provide credit to contractors who may not have the operating history or balance sheet required to qualify for a traditional loan.
How does Contract Financing work?
Contract financing involves three parties: a seller, a buyer, and a factor.
It works like this:
- The seller is awarded a contract to deliver a product or provide a service and generates an invoice to the buyer
- The seller submits the invoice to the factor for purchase
- The factor purchases the invoice from the seller by paying most of the invoice amount (typically up to 90%) to the seller
- When the invoice is due — say 30, 60, or 90 days out — the buyer pays the invoice to the factor
- The factor releases the remaining invoice value to the seller, less a fee (typically 1-2%)
How does Contract Financing impact my business?
Contract financing helps businesses meet their payroll needs, purchase additional inventory and equipment, and tackle larger contracts through the sale of unpaid invoices. When a factor purchases an invoice, it assumes rights as the creditor for delivered goods or services. Doing so allows the factor to mitigate risk and accelerate the flow of working capital by recouping advanced funds from customer payments. The most notable change you’ll experience is that your customer is now paying the factor, and the factor is paying your business.
How can I qualify for Contract Financing?
Contract financing works for many but not all kinds of businesses and has some specific requirements:
Sell goods or services to government agencies (B2G)
You must sell goods or services to government agencies and generate an invoice. Without an invoice or accounts receivable, there is nothing to finance.
Invoice for delivered goods or services
Government agencies must be legally obligated to pay your invoices. Therefore, the goods or services provided must have been delivered, creating an invoice. Progress billing is not accepted.
No existing pledges (liens) on your receivables
Your receivables must not be pledged as security to someone else, like an existing lender. Otherwise, the existing lender will have to “subordinate” so the factor has a first-priority claim on the receivables. Since your receivables are the primary source of repayment, the factor will need to be in “first position” over other lenders.
Where can I learn more about Contract Financing?
Learn more about Contract Financing and how it can help grow your business by viewing LSQ’s Contract Financing page here.
Interested in learning how LSQ can get your business paid faster? Contact us for more information.
LSQ provides contract financing and alternative funding solutions to businesses in need of working capital. With over 20 years of industry experience, our familiarity with iRAPT and government paperwork processes make partnering with LSQ a seamless experience. We deliver straightforward options and helpful resources for B2G companies, which include integrated back-office services, innovative accounts receivable-focused technology, and a robust partner network.