What is Government Contract Financing?

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Government contract financing is when a company needs to fund the costs of their operation because the government awards billions of dollars to private companies throughout the United States in order to help them complete their assigned jobs. They also have trouble with not having enough money to pay their vendors. A company needs to get funding before bidding has been submitted. Why? To prevent a situation where you won a bid but cannot execute it due to funding. Getting funding makes the project easier because you need to get the bid.

Two Options

There are two options with regard to how to obtain financing for government projects. Option #1: The Small Business Administration. Option #2: Invoice Financing/AR factoring. Option #3: Purchase Order Financing, Option #4: Supplier Financing, Option #5: Assert-based lending. With Option #1, the Small Business Administration, you are offered several different ways to help your small to midsize business by using microloans, or a line of credit extending to $50,000, because of limits that vary state-to-state. Larger businesses need to consider CAPlines or a specific type of 7(a) loan. This loan is ranging from $5 million dollars, which can be designed in better ways because the SBA does not loan money directly. The banks will then underwrite the loans.

Invoice Financing, Option #2

Business owners have a way to use an invoice factoring program specializing in government receivables, allowing a business to finance invoices, so as to provide cash flow to pay for operating expenses. An advantage of factoring is the flexibility that the government contract can provide, the flexibility that can help your business qualify. Setting up the credit line takes a week or two. Loan underwriting is the process by which a lender determines if the borrower’s loan application is an acceptable risk for the bank to take.

Option #3: Purchase Order Financing

Wholesalers purchasing large orders use this to pay the costs associated with a specific order from the government. The funding helps the company: become able to fill the order while also booking the venue with a flexible line of credit available. This strategy works with wholesalers who resell products because orders that have higher margins for profit if it is usually above 20% because the owner has to set up a line with proof that the owner can pay it back in a reasonable time frame.

Option #4: Supplier financing

Supplier financing relies on a supply chain where a company provides your business with credit, and also an ability to negotiate about a businesses’ supply purchases. This product works those companies that have an established track record such as at least three years of history in business, so the product might be compatible with your existing finance structure.

Option #5: Asset-based lending

This option is valuable for larger, more established companies, in need of financing. Business owners need to fund accounts receivable, inventory, and equipment with the financing lines that are structured to mimic lines of credit on term loans that are based on the companies’ fundamental financial asset lines, requiring financing. Smaller businesses are forced to wait 1-2 months to be paid for an expensive bid that turned into a job. Government Contracting Financing sells finished government contract jobs, where a company would sell incoming monies. In order to contact the government, a company has to send written correspondence out or use the phone to gauge interest in the company’s ability to pay the factoring loan back. Companies have to make sure to pay the government back for its interest in the company it gives loans to.

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