Working for a government construction project is a highly coveted task for most construction companies. Government contracts tend to span years and they are also large-scale, which means that the invoices and potential earnings are also huge.
On top of that, the government is also obligated to fulfill their contractual obligations. Payment is guaranteed to arrive, although you may not always receive them on time.
Just like private companies, the government also does not pay their contractors and material suppliers right away; construction businesses can therefore still experience cash flow issues. Government invoice factoring is one way to finance your project and address these cash flow issues.
- What is government invoice factoring?
- How does invoice factoring for government contracts work?
- How does government invoice factoring different from factoring in other industries?
- Do all factoring companies accept invoices from government contracts?
- Who qualifies for government invoice factoring?
- Why consider government invoice factoring?
- What are the benefits of government invoice factoring?
- What are some possible issues with government contract factoring?
What is government invoice factoring?
Government invoice factoring is one of the many funding methods that you could use to finance your operations when fulfilling a government contract.
Instead of borrowing money from a traditional lender, government invoice factoring allows you to fund your project without having to deal with strict loan application processes and potentially burying yourself in debt.
How does invoice factoring for government contracts work?
Government invoice factoring works in the same way as invoice factoring in private projects.
- Apply to an invoice factoring company that accepts government contracts
- Sell your invoices to the factoring company to get partial advance payment
- Receive the rest of the payment minus the factoring fees
1. Get in touch with an invoice factoring company that accepts government invoices and apply.
Each factoring company has their own application process. This process is fairly simple: you just have to submit the necessary information that the company requires and you wait for their decision, including the factoring rates that they are willing to offer.
Note that not all invoice factoring companies accept government contracts. You will have to do your research and see which companies deal with public projects and which among them offer the best rates.
2. You sell your invoices to the invoice factoring company and receive the partial advance payment.
Once you have settled on a factoring company and have been approved, you may now sell your invoices to that company.
Say, you sealed a government deal that is worth $1,000,000. As with most construction contracts, you will not receive the payment for this amount until much later, usually between 30 to 90 days. Within that 30- to 90-day span you will have to pay your laborers and staff, buy materials from vendors, and incur other expenses.
You may not have enough resources in your account to cover all those costs before you get paid, and so you approach your factoring company and sell them your invoices. The factoring company will then pay you 80% to 90% of the expected receivable, depending on the rate that they odder.
In this scenario, the factoring company can give you an advance payment of $800,000 to $900,000 which will help you offset the construction costs for the project. Meanwhile, the factoring company will be responsible for collection the full $1,000,000 payment from the government agency that hired you.
3. You receive the rest of the payment, minus the factoring fees.
Once you have finished the project and the government agency has handed the full payment to your factoring company, you will now receive the rest of payment. However, the factoring company will take part of this amount.
The amount that the factoring company will keep to themselves counts towards your factoring fees, which is essentially your payment to them for giving you the advance payment before your invoices have been settled.
How does government invoice factoring different from factoring in other industries?
The primary difference between government invoice factoring and factoring in private construction projects is the client. When you are working on a publicly funded project, your client is the government party that hired you, whether it is a local school district or a federal agency.
Government invoice factoring is also different from factoring in other industries because government contracts are generally more difficult to secure. You go through a lengthy bidding process and you are also subjected to other factors such as potential changes in leadership following an election.
Do all factoring companies accept invoices from government contracts?
Not, not all factoring companies deal with government contracts.
While the invoice factoring process is not just the same for both public and private projects, having the government as the client may not always be convenient. The government is obligated to fulfill all contracts that they sign, but the payments may not always come on time.
Government contracts also tend to be for large-scale projects that span years to fulfill, so the invoice amounts can be very high, and therefore very risky, for factoring companies.
Do note, however, that the government may favor small to medium businesses in order to give a fair chance to all competitors in the industry. Small to medium businesses tend to not have as much financial resources, so government invoice factoring is definitely worth considering.
Who qualifies for government invoice factoring?
Contractors and material suppliers can all qualify for government invoice factoring. Subcontractors may also qualify for invoice factoring, but their client will not be the government — they are in contract with the general contractor.
Subcontractors can still apply to a factoring company and go through the same invoice factoring process.
Why consider government invoice factoring?
Working for the government is a very good deal because they are mandated to settle the contracts that they sign. However, this does not protect you from having to deal with cash flow issues when working on publicly funded construction project.
· Invoices do not get paid right away
As with most construction projects, your invoices for the government will not get settled as soon as you finish part or all of your deliverables.
Most contracts with the government follow the net-30 to net-90 payment terms. This means that after you perform labor or provide materials to a project, the payment deadline will still be 30 to 90 days after you render your service.
This payment set-up will slow down your cash flow, and not all construction companies can afford to wait until the payments get settled. Invoice factoring can help you offset the waiting period by receiving the advance payment from the factoring company.
· Vendors, laborers, and staff have to be paid
As you work on a project, you need to continuously spend money on various things, including costs for materials and equipment and payment for your laborers and staff.
You need to shell out money but you may not have the resources to do so, especially if you are relying on the invoices that you will receive from your project.
Even if you have planned your spending according to the scheduled payment deadlines, late payments can still occur even when you are working with a public entity. Invoice factoring can address this issue.
When you receive partial advance payment for your invoices, you can fund your day-to-day operations and let the factoring company settle the invoices with your government client.
· Start new projects
When cash is tight, it’s hard to keep pushing to start new projects. You may have landed new clients but upfront payment is not always possible (and is in fact rare!) in construction. Invoice factoring allows you to accelerate the receipt of payments from other projects so you can start new ones faster.
What are the benefits of government invoice factoring?
Unlike other construction financing methods, government invoice factoring has many advantages that could help you improve and grow your business.
- You are dealing with a reputable client
- You do not have to go through a stringent application process
- You do not acquire more debt
- You get a flexible payment deal
The government is a reputable client.
Factoring companies typically gauge the rates that they offer depending on the reputation of the clients. If the client is notorious for being delinquent then the factoring fees—the amount that the factoring company takes from your receivable—tend to be higher.
Factoring companies do not want to take risks on clients that are known for not settling their invoices. Luckily, the government generally has a good reputation in fulfilling their contracts.
There are laws and regulations that mandate the government to pay the people that work for them. Even if the government is subjected to political changes and there are risks of not settling the bills on time, public agencies are still held to a higher standard compared to private companies.
You do not have to go through a stringent application process.
Securing a government contract is already difficult enough. Securing funding from traditional financial institutions may be something that you are not willing to spend time and resources on.
When you take a traditional bank loan or when you opt for small business loans, chances are you have to prove to the lender that you are in good shape to borrow money and pay the necessary interests afterwards.
While banks offer better rates compared to invoice factoring, they also favor bigger and more established construction companies. Businesses that are still trying to build themselves up tend to get rejected for loans because they pose higher risks of going on default.
You do not acquire more debt.
Acquiring piles and piles of debt is not the way to go when you want to grow your business. Invoice factoring allows you to get the funding that you need without having to borrow money and potentially bury yourself in debt.
With government invoice factoring, you can receive part of your expected payment from a third party company. Once your expected payment arrives, the third party company simply gives you the rest of your payment minus the factoring fees.
By going with government invoice factoring, you are able to fund your project without possibly risking your credit rating, which could only be bad for your business in the long run.
You get a flexible payment deal.
Another advantage of choosing government invoice factoring over traditional loans is the flexibility it offers.
Most bank loans would require you to spend you funding on specific items such as heavy-duty equipment. With government invoice factoring, you can spend the advance payment you receive in any way you like, whether it be for equipment rental or staff payroll.
What are some possible issues with government contract factoring?
- Government contracts are hard to obtain
- Payment terms can be between 30 to 90 days
- Federal payments can be late
Government contracts are hard to obtain.
The biggest, most obvious issue concerns the government contract itself—they are definitely very difficult to obtain. To secure a government contract you have to submit a detailed proposal and go through a long bidding process, not to mention that you will also be competing with a lot of other companies.
While the government aims to even out the competition by giving smaller companies a chance, there are more established companies that could bid for lower contract amounts just because they could afford to do so.
Winning a government contract is therefore a huge deal, and so you must take the opportunity to potentially grow your business.
Payment terms can be between 30 to 90 days.
The government is not so different from private companies because they also pay their clients after the service has already been performed. Invoices can be settled in as early as 15 days, but sometimes the due dates can be between 30 to 90 days.
Construction businesses, especially the smaller ones, may not be able to afford to wait for such a long time before getting paid. Having stagnant invoices may be detrimental to your business, and the invoice factoring companies may ask for higher factoring fees.
Before settling on a factoring company, make sure that you do your research and look around for a factoring company that offers the best rate. It is highly advisable that you choose a factoring company that specializes in government contracts.
Payments can be late resulting in more factoring fees.
The government may not always pay you the money right when you need it. They can potentially go through government shutdowns, they strictly adhere to statutory holidays, and their leadership might change which could affect how the contracts may be executed.
Invoice factoring helps you deal with these risks. Once you sell your invoices to the factoring company, they take responsibility for collecting the invoice receivables from the government. This means that your payment will therefore be tied to your invoices and not the contract.
Again, this may result if your having to pay higher factoring fees so make sure that you are dealing with a reputable factoring company. Also be wary of hidden fees that may come should late payments issue arise.