Feb 1, 2023
Government receivables finance is a term that refers to different financing techniques that a business can use to get funds against the amounts owed to that business by government organizations in form of outstanding invoices. Receivables are also called trade receivables or, sometimes, accounts receivable. By financing government receivables, a business can receive its payments earlier from a financing company to maintain cash flow and grow further.
There are various types of receivable financing techniques. Some of these are:
· Invoice Discounting
· Asset-based lending
This financing method requires a company to sell its receivables to a third party (the financing company) called the factor. Usually, a business gets between 70% and 90% of the value of the chosen receivables from the factor.
The factor will collect the payment later from the business’s customer (which in this case is a government organization or the government itself) at maturity and will send the remaining amount (after fee deduction) to the business.
One should not confuse factoring with reverse factoring or supply chain finance.
While factoring allows you to sell your receivables to a third party, asset-based lending allows you to secure loans based on your assets, such as accounts receivable. Besides, asset-based lending can also be secured by using other assets such as inventory and equipment as collateral.
Invoice discounting is another technique similar to factoring with the difference that the company remains responsible for getting the payment from its client (in this case, the government). Hence, invoice discounting is done on a confidential basis as the company’s customers might not be aware that invoice discounting is being used.
Accounts Receivable (AR) Financing is also sometimes an option; however, this means different things to different people. In some cases, account receivable financing is interchangeably used for receivable financing, while others may use AR financing term for factoring.
Government contractors when working with government projects and orders often face the issue of slow payments or cash flow issues. Government receivable financing is the right choice for you if you are a business owner and have invoices unpaid by the government.
However, when thinking about federal invoice factoring or other financing options to support your firm financially while working on government contracts, the best next step is to consult with an invoice financing and factoring company. It will review your choices and find a solution that matches your needs.
In the case of receivable financing, customers are not required to pay until a date in the future. While this benefits customer, it can strangle the cash flow on the company’s side. Sometimes, having cashflow issues also make it difficult for companies and government contractors to fulfill customer orders or invest in business growth.
Fortunately, with government receivables financing, government contractors and businesses who deal with government projects can overcome the problem of cash flow or stunted growth with ease. By getting early payment of invoices before their due date, companies can reduce the delay between purchasing raw materials and receiving payment from government customers. In addition, they can also use the amount for R&D, innovation, and business growth and expansion.
In short, government receivables financing in the case of factoring can be comprehended with the simple process shared below:
· As a government contractor, you sell goods or deliver the project to the government.
· You issue an invoice to the government.
· You sell the invoice to the factor i.e. the financing company.
· The factor i.e. financing company pays you a cash advance of 70 to 90% value of the invoice.
· The government pays the invoice by the due date.
· The factor sends the balance amount to you with fees deducted.
Government receivables financing is one of the best financing routes for government contractors as it provides them with consistent working capital for business. By choosing this option, you can meet regular expenses for current projects, as well as future plans.
Waiting for a long time for payments makes it harder for you to bid on new contracts or grow your business. Government receivables financing can help you manage your payroll, overhead costs, and materials seamlessly while ensuring that you can meet the order fulfillment requirements of current projects and grab new business opportunities without any disruption.
There are several things to consider when choosing the right receivable finance option.
Receivables financing techniques such as factoring can be on a recourse or non-recourse basis. In a non-recourse arrangement, the financing firm takes most of the risk if your customer fails to pay invoices. In a recourse arrangement, your business will remain responsible for any issues if the payment fails.
You need to decide whether you want to sell receivables to a financing company or secure a loan against the company’s receivables.
When you make a confidential arrangement, your customer will not be made aware of the arrangement. However, if you are choosing a non-confidential arrangement such as factoring, your customer will be informed that financing is taking place.
When looking for a financing firm to finance government receivables, you must carry out due diligence. Apart from doing checks on its reputation, see if the financier provides you with a cash advance within one or two days instead of two to three months. See what options they offer government receivables financing and if they meet your specific needs. Also, pay attention to how much fee they charge.
At Royale Capital, we offer various government receivable financing options to suit your unique needs. We offer asset-based lending, personalized loan solutions, AR financing, and Invoice Financing/Factoring. We aim at financing government receivables for our customers in the most convenient and hassle-free manner. If you have any queries related to government receivable financing, please get in touch with us right away.