However, working on a government contract also requires a significant investment. If you get a government contract, you’ll most likely need some form of government contract financing to cover the project’s costs. For companies selling finished goods, government purchase order financing might be a viable option.
Read on to understand how it works.
What is Government Contract PO Financing?
As the name implies, purchase order financing is a form of business financing where the company uses its purchase orders in exchange for additional capital. Unlike a typical financing arrangement wherein the financing company hands the money out to the business owners, with PO financing, the company gives the money directly to the suppliers.
Businesses often don’t have enough capital to cover the costs of fulfilling the projects, especially for government contracts that require a significant investment. With PO financing filling the gaps, they won’t have to worry about the risk of late or default deliveries that could potentially cost you the contract and your business reputation.
How Government Contract Financing Works
Purchase Order (PO) Financing works by partnering with a third-party financing company to get an additional cash injection. Once approved, the transaction is pretty straightforward.
PO financing consists of four key players:
- The business, also known as the borrower
- Customer, which in this case, is the government
- PO financing company
Here’s how it works.
Step 1. The company sends the purchase order (PO) over to the financing company. The financing company then reviews the PO to assess whether it qualifies or not.
Step 2. If the PO qualifies, the financing company will start the underwriting process. Depending on the lender, the funding could take around 24 hours to a few business days.
Step 3. After everything is processed, the financing company releases the money and sends it directly to the business supplier.
Step 4. Once the supplier receives the money, they will start working on the project.
Step 5. The supplier then delivers the goods to the customer. The customer will acknowledge that they have received the products.
Step 6. The business sends an invoice to the federal government.
Step 7. The government will pay the financing company directly.
Step 8. The financing company deducts the amount they financed (plus fees), and gives the remaining balance back to you.
PO Financing Costs
There’s no sure way of telling how much a government PO financing costs since the rates vary by lender and the business’s (borrower) qualifications or risk. Generally, the rates may start at 3% every 30 days.
You can shop for offers from different government contract financing providers to get a definitive answer. From there, you can compare rates and choose the one that best suits your business’ needs and situation.
Who Qualifies for PO Financing for Government Contracts?
Although it’s easier to qualify for purchase order financing than other types of government financing products, there are specific requirements a contractor must meet. Here are some of them:
- The business must sell finished goods
- They (the company) must sell products that are not modified or customized in any way.
- The company’s gross margins must be at least 20%
- The supplier must have an excellent financial track record and credit history
- Purchase orders must amount to at least $100,000.
The Bottom Line
The government sets aside more than $500 billion in contracting dollars each year, and winning a government contract opens up many opportunities for your company. However, you have to make sure that you have the capital needed to cover the costs of the project.
When working with the government, purchase order financing can be your best government contract financing option to fill the order. As long as you can meet the requirements, PO financing can fill the gaps, giving you the flexibility to grow and expand your business as you see fit.