Using Government Contractor Financing to Bridge Cash Flow Gaps

eCapital Corp

Last Modified : Jun 27, 2024

The U.S. Federal Government is the world’s largest enterprise and is the single largest purchaser of goods and services in the world. The market is worth over $100 billion in sales to small businesses each year and many contracts have 3-5 consecutive year contract terms. Servicing government contracts can be a way to start a small business or become the bread and butter revenue for a growing business, but be aware of the financial challenges. To bridge the cash flow gaps that can derail your ability to service the contract, SMBs depend on government contractor financing.

For business owners, maintaining reliable cash flow ranks high on the frustration list as unpredictability often impacts government spending. Companies serving government contracts must operate within a volatile environment, as budget cuts, re-appropriations and consolidations occur within the agencies. Further, since the government retains the unilateral right to redirect priorities, contractors must be prepared for contract change orders and terminations that suddenly alter the relationship. Through this uncertainty, business owners need to implement a flexible funding strategy to ensure access to working capital – invoice factoring is a mainstream financial strategy and an ideal financing option for government contractors.

Gearing up

Your company worked hard to earn a government contract – the procurement process was extensive and lengthy, taking up to a year or two to get the contract. Once awarded that hard fought contract runs the risk of being protested by a competing contractor, a frequent occurrence in today’s competitive environment. Assuming all goes well and the contract is upheld, your company now needs to gear up with staff and equipment to service the contract. It can be nerve-wracking to see your contract expenses increase during this process – when it comes time to invoice, receiving prompt payment is critical to the long term sustainability of your business. The cash flow lag between invoicing and payment can be disastrous for small businesses who need to continually outlay money for payroll and expenses. Bridging this cash flow gap is how a flexible government contractor financing solution becomes most helpful.

Proper invoicing and prompt payment

Reliable cash flow is key to sustaining business. Government agencies are bound by legislation to pay bills in a timely fashion to SMBs. If the business completes its end of the contract, the Prompt Payment Act requires the US government to pay a small business within 30 days after receipt of an invoice. However, even with these safeguards in place, government receivables can be some of the most difficult invoices to collect. The 30 day clock starts only when your invoice is received and deemed “proper” under the law. If the invoice is not deemed “proper”, it will be sent back to you within seven days with a statement detailing why it was rejected. You will then have to correct it, resubmit it to the government, and restart the 30-day wait.

Government policy is to pay all contractors by electronic funds transfer (EFT) whenever feasible. In making EFT payments, the government uses the information contained in the Central Contractor Registration (CCR) database. To be paid, your company must be correctly registered in the CCR database, otherwise the government may suspend payment until correct information is entered. It is your responsibility to ensure that the information in the CCR database is current and correct. Failure to submit a properly formatted invoice, or to be correctly registered in the CCR database will delay payment and disrupt cash flow.

How to maintain positive cash flow?

Invoice factoring has become a preferred financial strategy for government contractor financing. This is due to its ability to streamline the formalities of government requirements and convert invoice receivables into immediate cash without delay. For many company owners, invoice factoring is an ideal government contractor financing option as it creates instant positive cash flow to support operations and fuel growth.

How does invoice factoring work?

• Your company delivers the product or services as per the contract, and invoices the government agency, sending a copy invoice to the factoring company.
• The factoring company advances up to 90% of the invoice value within 24 hours and transfers the amount directly into your account. The balance owing is held as a reserve.
• The factoring company collects full payment from the government and releases the reserve, transferring the remaining amount owing directly to your account.
• A small factoring fee is deducted once the transaction in complete.

Benefits of Invoice Factoring

The immediate benefit of receiving cash in hand within 24 hours of submitting an invoice is further augmented by the multiple additional benefits of this government contractor financing option such as:

• Cost free accounts receivable management
  Your business is to service the government contract and comply with all requirements to fulfil your contractual obligations. The last thing you need worry about is chasing the government to pay its bills and collect your remittance. An invoice factoring company takes care of this task by providing a professional collections team to manage billing and receivables in a courteous and professional manner.
• Easy Payment terms
  It can’t get much easier – there are no regular payments to meet and no growing debt to service. Instead, the factoring fee is deducted from the transferred funds with no further obligation to meet covenants or monthly carrying costs.
• Funding grows as your business grows

Because funding is based on the value of your accounts receivable invoices, the more your business grows, the more funding becomes available. It is the only form of funding that is tied to sales, the more you invoice, the more cash you’re eligible to receive.

• Knowledgeable staff

Government contracts are heavily regulated (by the FAR, CAS, DFARs) to ensure uniform policies and practices across government agencies. Familiarity with government contracts and complying with terms and conditions is essential to interface seamlessly with your government agency. It takes knowledge, familiarity and discipline to comply with these regulations that otherwise can be hard to decipher and harder to comply with. Invoice factoring companies with government contract experience can guide you through the myriad of rules and regulations required to ensure accounting compliance and avoid the pitfalls that can easily derail your company.

• Dedicated customer service

A reputable factoring company will provide a dedicated account manager to work with you one-on-one as required to ensure hassle free funding. A robust online portal provides 24/7 access to your account providing full transparency with real-time transactional monitoring, historical data plus easy to monitor credit limits and balances.

The pathway to profit

The on-going budgetary constraints faced by government agencies impacts contractors as they are pushed to lower prices more and more. In order to win, perform and get paid for a government contract, strict adherence to low costing requirements, plus labor laws such as contractor wage and benefits requirements must be maintained. Government contractors are expected to reduce costs and adhere to regulations while still providing the same quality service.

These requirements place tremendous constraints on a company’s bottom line and restrict profit margins. To compensate contractors use government contractor financing to create reliable cash flow that will support operational efficiency. Trained employees, upgraded equipment, technological innovations and effective work practices are the pathway to profit.

An easy alternative to bank financing

The role of banks are dramatically changing as they reassess small business portfolios and continue to retreat from lending to SMBs. Small business can no longer depend on the commercial banking system to provide government contractor financing. In response, contractors have adapted by using alternative forms of financing. Invoice factoring is an effective government contractor financing solution to ensure funds are available as needed to pay bills, meet payroll, manage insurance premiums, and cover daily operating costs. Factoring is a quick and easy alternative to bank financing that offers additional benefits well beyond the scope of debt financing. Simple qualification requirements, fast funding and back office support are good enough reasons to justify the use of invoice factoring – but perhaps the most appealing benefit of this government contractor financing option is the increasing availability to capital as the business grows.

To learn more about how to use invoice factoring for government contract financing, visit eCapital.com

eCapital Corp

eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.