The Ultimate Guide to Factoring Government Contracts

Working on government contracts can be great for businesses, as they’re often lucrative and entail reputation-building responsibility.
A close-up of a person signing a government contract in an office

Everything You Need to Know About Government Contract Factoring

Working on government contracts can be great for businesses, as they’re often lucrative and entail reputation-building responsibility. 

However, many business owners find themselves stretched to their limits as they navigate this unique set of challenges, primarily rooted in the intricacies of government bureaucracy. Government agencies are often mired in red tape, resulting in lengthy payment processes that can significantly disrupt a contractor’s cashflow.

Government contract factoring, or government invoice factoring, is essential in this context. It offers a lifeline to contractors, enabling them to bypass bureaucratic hurdles and access much-needed funds immediately. 

This comprehensive guide covers everything you need to know about factoring government receivables. We’ll discuss how it works, the benefits for your business, what to look for in a government factoring company, and how to apply. 

What Is Government Contract Factoring?

Government contract factoring is a specialized financial solution for businesses designed to address the unique cashflow challenges faced by government contractors. It applies to governments of all levels, from local municipalities to the federal government. 

Also known as accounts receivable financing, this tool allows contractors to convert their outstanding invoices into immediate cash. In essence, it’s a financial strategy that enables government contractors to bridge the gap between completing a project and receiving payment from government agencies.

Factoring government contracts negates the need to wait days, weeks, or even months for agencies to pay what’s owed. When you partner with an experienced government invoice factoring company like REV Capital, you simplify the accounts receivable process.

Learn more about invoice factoring with REV Capital.

The factoring company then assumes the responsibility of collecting invoices, in this case, from the government. The government factoring company repays the remaining balance once all of the outstanding invoices have been collected, minus a small fee for their services.

It offers a practical solution to the problem of delayed payments, helping contractors maintain liquidity, cover operating expenses, and pursue new opportunities in the highly competitive government contracting market.

→ Related resource: Why Is Invoice Factoring Crucial to Growing a Business

Understanding Government Contract Payments

Government contract payments involve a structured and often rigorous process to ensure transparency, accountability, and adherence to legal and regulatory requirements. 

First, a government representative carefully reviews all invoices to ensure compliance with contract terms. This verification process includes confirming accuracies, costs, and other contract details. Verified invoices then move through an approval process, often involving multiple levels of review and approval within the agency.

two government employees review a contractor invoice

Payments are only processed after approval. They also often use specialized payment systems, such as Wide Area Workflow (WAWF) or Invoice Processing Platform (IPP), to process and manage payments. 

This process takes 30 to 90 days, if not longer. Payment delays and disputes can be common due to bureaucratic processes, changes in project scope, or issues with deliverables. This is why government invoice factoring is one of the most effective strategies to manage cashflow effectively.

Turn Your Outstanding Invoices Into Cash

How Factoring Government Receivables Works?

While the government payment process is highly complex, you can expect a government contract factoring agreement to be quite simple. When working with a professional invoice factoring company like REV Capital, this is what contractors can expect:

Step 1

The contractor applies to a factoring company specializing in government contracts. They will be required to submit information about their business, including the types and amounts of government contracts they hold. The factoring company assesses the risk, and once approved, an agreement is established.

Step 2

The contractor provides goods or services and generates invoices. Instead of waiting for extended government payment cycles, the contractor submits these invoices to the factoring company.

Step 3

The factoring company advances up to 98% of the invoice’s value to the contractor upfront. This initial advance provides the contractor with immediate working capital to meet expenses, invest in growth, or take on additional contracts. The remaining percentage, minus a factoring fee, is held in reserve.

Step 4

The invoice factoring company takes responsibility for collecting payment from the government agency or entity responsible for the contract. When the government agency pays the invoice, the factoring company releases the reserve amount, minus their fee (1% to 3%), to the contractor. From there, the relationship between the government contractor and the factoring company is ongoing, enabling the contractor to factor invoices for multiple contracts.

How Contractors Benefit From Government Invoice Factoring

1. Faster Payment

It’s no secret that bureaucratic processes often move at a snail’s pace. Factoring for government invoices eliminates this concern by providing immediate funds, rendering the delayed payment of invoices inconsequential.

2. Improved Cashflow

Factoring government contracts gives businesses an influx of cash when they need it most. Rather than waiting for payments to come in, companies can access the majority of the invoice's value upfront. This capital can then be used to cover operational expenses, pay employees for labour, and invest in growth.

→ Related resource: 5 Tips to Better Manage Your Cashflow

3. Reduced Administrative Burden

Managing invoices, tracking payments, and handling collections can be a time-consuming and resource-draining process for government contractors. Government contractor factoring alleviates this administrative burden by providing valuable support.

4. No Debt or Dilution

Government contract factoring serves as a pillar of financial stability for contractors. The predictability of cashflow achieved through factoring ensures that businesses can meet their financial commitments consistently. Because government invoice factoring is not a loan, businesses avoid accumulating additional debt on their balance sheets due to high interest rates.

→ Related resource: How to Protect Your Business From High Interest Rates

5. A Competitive Edge

Government contracts are often highly competitive. Invoice factoring for government contracts can provide a competitive edge by allowing businesses to offer more favourable payment terms to government agencies. In turn, this positions them as more attractive candidates for contracts and increases their chances of winning bids.

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Government Factoring vs. Other Financing Options

It’s important, as government contractors, to make informed decisions when it comes to financing options. Let’s compare the most common:

Lines Of Credit

Government factoring is specifically tailored to government contract receivables, whereas lines of credit are versatile—but may not offer the same level of dedication to government contract needs.

When seeking approval from a bank, they’ll generally assess your fixed assets to determine whether or not to grant you a line of credit. This can be a non-starter for businesses just getting started. Furthermore, even if approved for a line of credit, there is no guarantee the bank will provide enough capital for it to be worthwhile.

Factoring allows contractors to access funds equivalent to the invoice values.

→ Related resource: How to Avoid Bank Overdraft With Factoring

Equity Financing

Equity financing involves raising capital for your business by selling ownership shares or equity stakes to investors. It’s primarily used by startups, small businesses, and growing companies. 

Diluting your business isn’t a sustainable solution. You can only give so much of your ownership away before you’re left with nothing. Factoring government contracts does not involve giving away any of what you worked so hard to build. 

Traditional Loans

Borrowing money is not an inexpensive proposition. Should your business pass the approval process and be granted a loan, you’re liable to find out rather quickly why the bank was willing to lend you money—because they make a fortune on it. 

Considering how interest rates are rising, you may quickly find yourself accumulating debt should you pursue a loan. Covering short-term costs at the expense of making it harder to pay in the long run is not a sustainable financial solution.

Don’t Settle for Debt

How Government Factoring Companies Evaluate Risk

Government factoring companies evaluate risk in a unique way, given the distinct nature of government contracts and their associated payment processes. Understanding how these companies assess risk is essential for government contractors considering invoice factoring.

Ideally, you want your company to be considered low-risk. Ensure yours checks these boxes to be approved for factoring for government invoices:  

Client Creditworthiness

Factoring companies value the financial standing of your clients more than your own. They will carefully assess the financial stability and reputation of the government entity issuing the contract. They may even maintain a list of pre-approved agencies with strong payment histories.

Contract Terms & Quality of Invoices

Contract terms and conditions play a role in calculating risk. A government factoring company will be looking closely at factors such as the contract’s payment terms, the history of payment delays or disputes with the government agency, and any unusual clauses that could impact the invoice’s collectibility.

Past Payment History and Contractor Creditworthiness

Contractors with a strong history of on-time payments and a solid financial track record are seen as lower risk. Factoring companies may offer more competitive terms to such contractors.

How to Choose a Government Factoring Company

The factoring company you choose is going to be communicating with government agencies and collecting invoices on your behalf. As such, you want to ensure they’re professional, knowledgeable, and well-suited to represent your business. 

Before factoring government contracts, consider the following:

Customer Support

Government contracts are serious business and can be high-stress. Ensure the factoring company you choose cares about you and your operations. Access to responsive and knowledgeable customer support is crucial when invoice factoring for government contracts. 

Industry Expertise

Choose a factoring company that has experience collecting from government agencies. Their industry-specific knowledge ensures they understand the unique challenges and nuances of your field.

Rates & Fees

Examine the terms and fees associated with the factoring agreement. Pay close attention to the advance rates, factoring fees, and any additional costs. Transparency is essential in this aspect.

The Government Factoring Qualification and Application Process

To qualify for government contract factoring, a business or individual must be actively involved in government contracting. This typically includes entities that have secured government contracts and are awaiting payment. Qualifications vary by factoring company and industry, however, businesses can generally expect to meet these criteria:

B2B service provider
North American customers
Monthly volumes up to $10 million
Clear audit trail
Creditworthy debtors
No consignment sales
No liens on A/R
No progress billing
No pre-billing
No warranties

Most government factoring companies accept online applications. The process is generally straightforward to understand, typically requiring:

  • Information about your business: Such as annual revenue, industry, and customer demographics.
  • Basic details about your invoices: Payment terms, periods, and other invoicing details.
  • Recent bank statements: While not often required, three to six months of statements help government factoring companies make their decision.

Once you submit an application and are approved, the factoring company will establish a government contract financing agreement with your business.
→ Related resource
: Experts Answer: Is Invoice Factoring Right For Your Business? 

Factoring Government Contracts With REV Capital

REV Capital has earned its place as a leading provider of full-service government invoice factoring in Canada and the United States

When you partner with an expert in invoice factoring for government contracts, like REV Capital, you gain access to a financial strategy that’s proven to be essential for thriving in the competitive world of government contracting.

We provide our clients with 24/7 access to a comprehensive online portal for ongoing support, industry-leading customer service, and competitive rates. You won’t find a more complete or supportive provider of government contract factoring anywhere. 

Not Convinced Yet?

Explore the financial stability that invoice factoring can offer. Speak to a REV Capital Client Relationship Manager today to find out how we can help with government contract factoring.

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