Editor's choice: Fundbox business loans
- May receive funds in 1 business day
- Receive 100% of invoice’s value
- Bad credit OK
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Government contracts are competitive — taking over a project for FEMA or the DOT often pays better than the projects a small business might find elsewhere. But you can wait up to three months after completing a job to finally get paid.
Government contract factoring is a solution that can help you meet payroll and keep your business’s lights on while you wait. But it can be more expensive than traditional business loans.
Government contract factoring is a type of accounts receivable financing that allows businesses to get an advance on unpaid invoices from the federal or local government. It’s also called government contract receivables factoring.
Government contract factoring can be particularly helpful to small businesses that rely on invoices to stay afloat financially and can’t qualify for a term loan or line of credit. It can also help you continue to bid on contracts while you wait to get those funds.
With government contract factoring, a business-to-government (B2G) business sells its unpaid invoices to a factoring company at a discount. The factoring company first advances you 80% to 90% of the invoices’ value. After the government satisfies its invoices, the factoring company pays the remaining 10% to 15% minus a fee.
Some factoring companies are willing to factor just one month of invoices — called spot factoring. Others require businesses to sign contracts for months or even years of factoring at a time. While spot factoring doesn’t require as much commitment, it tends to be more expensive.
Any business that regularly relies on government contracts can benefit from government contract factoring:
A main draw of government contract factoring is that it’s often easier to qualify for than more traditional types of financing.
Your personal credit score and business experience usually don’t count. Instead, your business must meet requirements that include:
Some factoring companies impose minimums on the value of your projects. Typically, invoices must be due in 30 to 90 days to qualify.
The main cost of government contracting factoring is the factoring fee. This fee is usually a percentage of the invoices’ total value.
Most companies charge a factoring fee in one of two ways:
Most factoring companies require your invoices to be due in 30 to 90 days. If your factoring company charges a flat fee, your invoices’ due dates don’t affect the cost. But with tiered fees, the sooner your invoices are due, the more you stand to save.
Say your business is owed $100,000 in invoices for government projects due in 90 days. Choosing between a flat 5% fee or a tiered fee of 3% for the first 30 days and 1.5% for every 10 days after, here’s what you’d face:
If the same invoices were due in 30 days instead of 90 days, here’s how the two types of fees would compare:
In the end, a flat fee might help your business save money if its invoices are going to take longer to pay off. But a tiered fee can help you save if they’re due in 30 days.
The government rarely breaches its contracts. But let’s say your contracts remain unpaid.
Some factoring companies offer recourse factoring, which leaves your business responsible for covering the cost of unpaid invoices. Others offer nonrecourse factoring, where the factoring company agrees to absorb the cost. Recourse factoring is typically less expensive than nonrecourse factoring, but it comes with more risk.
Thankfully, B2G businesses are protected from breach of contract by the Contract Disputes Act of 1978. If the agency you’re working with doesn’t fulfill its contract, contact the contracting officer responsible for overseeing your contract. The contracting officer will consider both sides of the case and come to a decision.
If you’re not happy with the decision, you can appeal it by taking your case to the board of appeals or escalate your case by filing a civil lawsuit with the US Court of Federal Claims.
Applying for government contract financing works a lot like any other type of factoring.
You may be looking for a simpler financing alternative that doesn’t involve your accounts receivable, in which case your options include:
Government contracting financing could be a cash flow solution for businesses that need working capital or funds to take on that next contract. But its high cost might be reason enough to look elsewhere.
Learn more about your business financing options in our business loans guide.
Image source: Shutterstock
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