What Is Government Contract Financing And How Does It Work?

Every year, the U.S. and Canadian governments provide small and medium-sized enterprises (SMEs) with billions of dollars of contracts to help create jobs and build long-term economic development.

This can be an excellent opportunity for SMEs to work with a government. Still, they need to fund upfront expenses and other operating costs before taking a project. Besides, the contractors need to wait for the government to pay invoices, taking one to two months. 

However, government contract financing helps businesses receive the working capital they need. This enables contractors to successfully put together bids and helps monetize invoices after the government contracts are concluded. To know more detail about government contract financing, let’s dive into the topic. 

What Is Government Contract Financing?

Government contract financing or government invoice factoring enables a business to access the cash bound in outstanding accounts receivables via the sale of the receivables or invoices to a factoring company.

It is also called government contract factoring, can become a great way to finance a business. When the job or contract is completed and an invoice is generated, the government agents have a 30 -90 day wait time before they pay the invoice.

The government contract is financed through factoring, asset-based lending, and the Small Business Administration (SBA) loans. For example, Endeavour helps with A/R Financing, SBIR Financing, Invoice Financing, and STTR Financing. 

Below are some advantages of government contract financing.

• It helps businesses with short credit history as the financing company depends on the client.
• It is easy and quick as it needs less paperwork and does not require unnecessary eligibility requirements like banks.
• It seems like a loan, but it is an outright sale of invoices to a factor.
• It is flexible enough to sell a couple of invoices without signing a long-term agreement.

How Does Government Contract Financing Work?

It is a contract between SMEs and the government to provide products or services, taking a 30 to 90 day period to get paid on invoices. The invoice is created when the contract is concluded and the government approves payment. So, government contract financing leads manufacturers and the government contractor to get working capital.

There are three entities involved during the government contract financing process, including the contractor, factoring company, and government agents. The business contracting with the government allocate their invoices to the factoring company via their contracting officers.

The factoring company proceeds to fund the contractors based on a standard factoring arrangement when it is completed. With that, all advance rates or discount rates and fees are agreed in advance. Look at the following steps how it works.

Step 1:

When the contract is completed, the seller generates the invoice approved by the government agents. Thus, the contractor or seller submits their invoices to the factoring company and receives amounts ranging from 80% to 95% of the amount of the factored invoices the same or the next day. For example, suppose you sell $500,000 worth of accounts receivables and receive a 90% advance; you can receive $450,000.

Step 2:

The invoice financing company holds the remaining 10% or $50,000 as security. The controls this portion until total invoices have been received.

Step 3:

Then, the factoring company expects to collect the remaining payment over the next 30 to 90 days based on the client’s payment terms.

Step 4:

When the period is matured, and payment has been received, the factoring company pays the sellers the remaining 10%. The factoring company includes a fee when paying the remaining amount, typically ranging from 1% to 3% of the total invoice value.

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