The following article
describes some methods for a business to fund government
contracts. Getting funding for government contracts may actually
be easier than getting funding for commercial contracts because the
credit worthiness of most (but not all)
government entities will not be an issue. If you have
questions not covered on this or other pages of our site, please
complete our contact
us form or give us a call at 1-800-598-1178.
Title: How To Fund Government Contracts
You have already won a
government contract and are wondering how you are going to come up with
the working capital to fund it, or you have completed the process of
getting on the government vendor lists and are thinking about bidding
on
some lucrative government contracts but are not sure how you will come
up with the
funds to perform on the contract if your company is awarded the
contract. We have some solutions which we will describe below
that can alleviate these concerns and allow you to concentrate your
efforts on how to acquire more government contracts.
The options we provide to help fund your government contracts are
listed below.
- purchase order financing
- accounts receivable
funding
- vendor assurance
programs
- asset-based loans
Purchase order financing is
used when your company is re-selling products that your company buys
from independent companies, and those independent companies require
pre-payment before they will ship the product to your customer.
The products could include (but are not limited to) any of the
following.
- appliances
- books or other
publications
- clothing
- office supplies
- medical supplies
- building supplies
- cleaning supplies
- containers and
packaging supplies
- chemicals
- furniture
- musical instruments
- tools
- any kind of equipment
or machinery
- vehicles
- spare parts
- weapons and ammunition
In some cases it may also be
possible to use purchase order financing where there is some
repackaging of the product that is required, or there is an
installation component
after the product is delivered. However, these situations are
much are harder to get funded than than those where finished good are
being shipped directly to the end customer and your customer takes
control of the product after delivery without any further involvement
from your company. To learn more about how purchase financing works,
please review the page FAQ's
About Purchase Order Financing.
Accounts receivable funding
provides advance payment on invoices for services that have been
rendered or products that have been delivered to your business or
government customers. The advance payments are made within 1 or 2 days
after an invoice has been presented and verified as being due and
payable. The advance rate for non-construction invoices are
typically about 80% of the invoice value, but can be higher or lower
depending on the situation. Construction invoices fund at about
70% of the invoice value less any retainage amount, and also can be
higher or lower depending on the situation. Accounts receivable
funding is used in situations where the payment terms are net 30 or
longer and your company needs payment sooner to fund operations or
growth. Some of the types of companies that can benefit from
accounts receivable funding are listed below.
- staffing companies
- transportation companies
- construction companies
- security companies
- manufacturers
- distributors
- wholesalers
- engineering companies
- architectural companies
- research and
development companies
- information technology
companies
- telecommunications
companies
- conservation companies
- social services
companies
- testing and inspection
services companies
- equipment maintenance
and repair companies
- building operations and
maintenance companies
- salvage services
companies
- medical services and
supply companies
- management services
companies
- printing companies
- training services
- landscaping services
The federal government understands that government vendors may have
cash
flow challenges that can benefit from the use of accounts receivable
funding. The Assignment of Claims Act of 1940 set up the legal
framework that sets forth the rules and procedures to be used so that
accounts receivable funding can be used on federal contracts. The key
document that must be completed by accounts receivable funding
companies
is a notice of assignment which directs payment on the invoice to the
accounts receivable funding company instead of the company providing
the products or services covered by the invoice. This allows the
accounts receivable funding company to be directly reimbursed for the
funds they advanced to your company when the invoice was purchased.
While the previous text addressed the federal framework for allowing
accounts receivable funding, it is also possible to use accounts
receivable funding at the state and local government levels as well. To
learn more about accounts receivable funding, please review the FAQ's
About A/R Funding page.
Vendor assurance programs are a middle ground between purchase order
financing and accounts receivable funding. What a vendor
assurance program does is give your vendor direct payment after you
invoice your customer for delivery of the product produced by your
company. Your company is not involved in making this
payment. It comes directly from the accounts receivable funding
company involved in
your transaction. From your vendors' point of view the credit
risk is being shifted from your company to your customer and the accounts receivable funding company. You should discuss with
your vendors if they
would be willing to do this. Vendor assurance programs are used
in situations where purchase order funding is needed, but a purchase
order funder is not willing to take on the risk. The most typical
situation for this is where your company is manufacturing a product in-house, but must acquire
parts from suppliers who require pre-payment before delivering to your
company and your company does not have the working capital on hand to
pay the suppliers. Most purchase order financing companies will
not get
involved in these types of transactions because the performance risk is
too great for them. They do not want deal with the risk that your
company will not be able to produce and deliver the product for any
reason. Under a vendor assurance program your vendors agree to
release the parts to your company with the understanding that as soon
as the finished product is delivered and invoiced to your customer
that the supplier will be paid directly by the accounts receivable
funding company that
is buying the invoice. Not all vendors will agree to do this, but
you should discuss this option with them to see if it is acceptable to
them. Under a vendor assurance program, any funds from the
initial advance that are not required to pay your suppliers are paid to
your company. Your company receives the balance due on the
transaction less the financing fees when your customer actually pays
the invoice.
Purchase order financing, accounts receivable funding, and vendor
assurance programs all make working capital available to your company
for funding government contracts without creating debt on your balance
sheet. This can be a major advantage to your company if the company is
under evaluation for sale, loans, or outside investment.
Asset based loans are a loan product that uses your accounts
receivable, inventory, equipment, and real estate as collateral.
The loan is based on a fraction of the value of each collateral
type. For example, usually about 80 percent of the value of the
receivables can be used as a borrowing base. Typical minimums for
asset based loans are about $250,000. This implies, of course,
that your company has collateral in excess of the amount of the
loan and looks financially healthy. A key requirement is that the
collateral to be used for the
asset based loan is not already security for another loan and is not
liened as security for an accounts receivable funding facility.
The asset based loan usually have a limited term and have monthly
payments. They are usually structured as a revolving line where
the value of the underlying collateral is reviewed on a regular basis.
To learn more about asset based loans, please review our page on Asset-Based
Loans.
If you have additional
questions, or if you would like to learn more about how we can help
your company obtain funding for government contracts, please
click here to contact us, or
Call us now at 1-800-598-1178
to get started.
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