Government agencies and businesses working on government contracts often need to get cash upfront or up front to fund a major purchase or investment. This is where invoice factoring comes in. It’s selling your company’s outstanding invoices at a discount in exchange for an advance sum.
For instance, you run a construction company, and your operating expenses include materials, labor, and rent. Each month, you get invoices from suppliers for materials you bought and services you paid for employees to work there. These are standard operational costs that all companies have to pay.
When you factor your company’s invoices with invoice factoring, you can access cash from the initial advance sum much faster than waiting for your regular business bank to collect payment from customers or suppliers over time or at set intervals. You also reduce the risk of not getting paid by delaying when your customers will pay their bills compared to collecting payments every month or fortnightly, so it becomes harder to catch up on overdue accounts.
The same goes with suppliers, who are more likely to pay once they receive an invoice stating the cost and quantity of the product they sold and received in exchange than when they receive their regular supply check-in reminder.
What is Invoice Factoring for Government Contracts?
Invoice factoring is a great financing option that allows businesses to turn unpaid invoices into cash. This process involves selling your outstanding invoices to a factoring company at a discount. The factoring company will then provide you with an advance on the value of the invoices, typically around 80% of the total amount. Once the invoices are paid, the factoring company will send you the remaining balance minus their fee.
Government contracts are lucrative, but they often come with extended payment terms. For example, a government agency may take up to 90 days to pay an invoice, which can strain a business’s cash flow. Invoice factoring helps companies to bridge this cash flow gap by providing them with the funds they need to cover expenses and invest in growth.
How Does Invoice Factoring Work?
Invoice factoring works by converting your outstanding invoices into cash. The process involves your business, customers or clients, and the factoring company.
Here’s how it works:
- You provide services or goods to your customers or clients and send them an invoice for payment.
- Instead of waiting for the price, you sell the invoice to a factoring company at a discount.
- The factoring company provides you with an advance on the value of the invoice.
- The factoring company collects payment from your customers or clients.
- The factoring company will send you the remaining balance, minus their fee, once the invoice is paid.
Invoice factoring is a quick and easy way to access cash flow. It’s also a flexible financing option; you can choose which invoices to factor in and when.
Benefits of Invoice Factoring for Government Contracts
There are several benefits of using invoice factoring government contracts:
Improved cash flow: Invoice factoring provides businesses the funds to cover expenses and invest in growth. This is especially important for companies working on government contracts, often with extended payment terms.
Easy to qualify: Invoice factoring is a relatively easy financing option to allow for. If you have outstanding invoices, you can find a factoring company willing to work with you.
Quick access to cash: Invoice factoring provides businesses with immediate access to money. Once you sell your invoices to a factoring company, you can receive funds within 24 hours.
No debt: Invoice factoring isn’t a loan, which means you don’t incur any debt. Instead, you’re selling an asset (your invoices) to generate cash flow.
Improved credit rating: Invoice factoring can help businesses improve their credit rating by giving them the funds they need to pay bills on time.
Eligibility Requirements for Invoice Factoring
To be eligible for invoice factoring, you need to meet specific requirements. These requirements will vary depending on the factoring company you work with but generally include the following:
- Invoices that are due within 90 days
- A creditworthy customer base
- A minimum monthly invoice volume (usually $10,000 or more)
- A business that is not in bankruptcy or has any outstanding tax liens
In addition to these requirements, you’ll also need to provide the factoring company with certain documents, such as your accounts receivable aging report and customer invoices.
Common Misconceptions About Invoice Factoring
Several Misconceptions about invoice factoring that needs to be cleared:
- Invoice factoring is only suitable for businesses in financial trouble: While invoice factoring can be a good option for businesses in financial difficulty, it’s also an excellent option for businesses looking to grow or needing to improve their cash flow.
- Factoring companies will take over your collections: Factoring companies do not take over your collections. They will handle the collections process for the invoices you sell to them, but you will still be responsible for collecting payment on any invoices you do not factor in.
- Invoice factoring is expensive: While it comes with a fee, it’s often cheaper than other financing options, such as taking out a loan or using a credit card.
- Invoice factoring is only for large businesses: Invoice factoring is a financing option that companies of all sizes can use. Many small businesses use invoice factoring to improve their cash flow.
Factors to Consider When Choosing an Invoice Factoring Company
When choosing an invoice factoring company, there are several factors to consider:
Fees: Invoice factoring companies charge fees for their services. Before selecting a factoring company, ensure you understand the costs and how they are calculated.
Customer service: Look for an invoice factoring company that provides excellent customer service. You want to work with a responsive company that is easy to communicate with.
Industry experience: Look for a factoring company that has experience working with businesses in your industry. This will ensure that they understand your unique challenges and can provide you with the best possible service.
Contract terms: Ensure you understand the terms before signing up with an invoice factoring company. Look for a company that offers flexible terms and does not require a long-term commitment.
Reputation: Look for an invoice factoring company with a good reputation. Read reviews and ask for references before choosing a company to work with.
Steps to Successfully Implement Invoice Factoring for Government Contracts
Implementing invoice factoring for government contracts can be a straightforward process if you follow these steps:
- Research: Research the different invoice factoring companies available to you. Look for companies specializing in government contracts and have experience working with businesses in your industry.
- Compare: Compare the fees, contract terms, and customer service of each factoring company.
- Apply: Apply for invoice factoring with the company you choose. You’ll need to provide them with certain documents, such as your accounts receivable aging report and customer invoices.
- Receive funds: Once approved for invoice factoring, you’ll receive an advance on the value of your outstanding invoices.
- Use funds: Use the funds to cover expenses and invest in growth.
- Repay: Once your customers pay their invoices, the factoring company will send you the remaining balance minus their fee.
