While winning a government contract can be a rewarding experience for your business, it also comes with its own set of challenges. Although they have perfect credit and are an excellent payer, it typically takes the government 30 days (sometimes even more) to pay the contractor. This can result in a month-long gap in the business’s cash flow, potentially causing a strain on the finances.
In such cases, invoice financing (also called contract financing) can help bridge the gap in the business cash flow. Business owners can advance the cash they need to cover their monthly payables or invest in other projects.
What is Invoice Financing?
Invoice financing, or contract financing, allows small businesses to advance cash against their customers’ outstanding accounts receivables.
Here’s how it works: The small business (government contractor) accepts a project from the government. They work on it, and once it’s complete or the goods have been delivered, they invoice the government. They set the payment term to, let’s say, 60 days, meaning they will have to wait until the end of the payment cycle to get the payment. Instead of waiting for the payment term to end, they submit the invoice to the financing company, which then advances up to 90% of the total value of the invoice.
The invoice financing company holds on to the invoice. They will also be the ones to collect the payment from the government. Once the customer pays, they will deduct the advanced amount, plus fees, and give the balance back to the business owner.
How Invoice Financing Helps
Based on the definition above, you may already have an idea of how invoice financing helps in the case of government contracts. Let’s get a closer look at how invoice financing can help contractors:
1. It Speeds Up Cash Flow
When working with the government, you can bank on the assurance that you will get paid. The problem is that the government is notorious for being a slow payer. Instead of waiting 30 to 90 days for the payment, invoice financing can advance the cash tied up on the unpaid customer invoices, allowing businesses to continue with normal operations. For government contractors who constantly experience delays in their cash flow, contract financing can be a saving grace.
2. You Won’t Have to Worry About Payment Collection
With invoice financing, the factor will be responsible for the payment collection. If your business lacks the resources to chase and collect payments, financing your invoices helps take the responsibility off your hands. That way, you can focus your efforts on other important business activities.
3. You Won’t Miss Out on Another Big Opportunity
You’ll most likely encounter another big opportunity for your business before the government’s payment terms end. Invoice financing assures you that you’ll have the capital needed to take on another project without getting stretched out too thin. Not only that, but with enough capital, you’ll be able to invest in business growth initiatives like new marketing strategies, product expansion, and more.
Other Types of Government Contract Financing to Consider
While invoice financing can be an excellent financing option, it serves a specific purpose: bridging cash flow gaps AFTER the services or goods have been delivered. In cases where the company needs additional funding to acquire the materials or inventory, or needs to present a significant capital (which is sometimes necessary when taking on government contracts), invoice financing may not be sufficient.
The good thing is, there are several ways to fund a government contract. This includes:
- PO Financing. PO financing is best for covering the capital needed to order or purchase goods from the manufacturer.
- Mobilization Funding. Mobilization funding programs are designed for businesses that need to present upfront capital for the government contract.
- Lines of Credit. Lines of credit can come in handy for companies that need continuous access to a credit line to pay for labor costs, additional inventory, materials, or equipment in the process of fulfilling the project)
- Asset-based loans. Companies can apply for asset-based funding to fulfill projects or cover gaps in cash flow using their equipment, properties, or other valuable assets as collateral for the loan.
Final Thoughts: Is Invoice Financing the Right Government Contract Financing for You?
If your business is strapped for cash because of an unpaid invoice from the government, invoice financing can be viable for your business. However, know that this type of financing usually comes with higher rates and fees than other options.
But it’s worth noting that invoice financing is just one of the several funding solutions for covering costs associated with government contracts. PO financing, mobilization funding, lines of credit, and asset-based loans could also be excellent choices. These options might be worth exploring if you’re working with government contracts.