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1. What Is Government Contract Factoring? →
2. How Factoring Government Receivables Works →
3. The Benefits of Government Invoice Factoring →
4. Invoice Factoring vs. Other Financing Options →
5. How Government Factoring Companies Evaluate Risk →
6. Selecting the Right Factoring Partner →
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
It’s important, as government contractors, to make informed decisions when it comes to financing options. Let’s compare the most common:
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.
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.
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.
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:
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:
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.
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.
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.
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:
Most government factoring companies accept online applications. The process is generally straightforward to understand, typically requiring:
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?
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.
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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