As you probably already know the United States Federal Government is by far the biggest consumer of goods and services in the world.
Businesses provide government agencies with everything they need to operate from food to eat, cars to drive, books to read … furniture … equipment … the list is endless.
However suppliers make up only 20% of the government’s contract spending.
The other 80% is for services rendered by businesses of all shapes and sizes.
Winning a federal government contract award can surely change things for the better for any mid-size or small business owner.
Operational excellence will require the contractor to be well financed in order to be able to meet the necessary cash flow requirements.
Those who have done contractual work for any federal agency know all too well that the amount of cash required can grow exponentially with government contracts, especially because most government agencies take net 45-60+ days to pay their invoices.
Having enough cash to make timely payments to your vendors, employees, manufacturers and for all other services will directly affect your contract performance.
To cover all of these added costs, businesses turn to government contract financing to obtain the necessary working capital.
5 Most popular types of federal contractors that obtain funding through Orumfy are:
- Product Distributors and Manufacturers
- Staffing Companies
- Construction Companies
- IT Specialists
- Security professionals and firms.
If you are a federal contractor use Orumfy’s platform absolutely free to see what type of financing options your business pre-qualifies for in seconds.
The application process is quick and easy.
Once you apply Orumfy will connect you with the right lender for your business model and walk you through every step of the process, to make sure you get the cash you need when you need it.
Government Contract Financing
Obtaining working capital to finance your federal contract after you have secured the contract award, know your contract price and went through procurement, is essential to your contract performance.
For that reason financial companies created multiple funding options, that enable any small business owner to have enough cash on hand to handle any cash flow requirements in such situations.
- Invoice Factoring
- Business Line of Credit
- Purchase Order Financing
- Supplier Financing
- SBA Loans
- Asset Based Lending
Government contract factoring is one of the easiest ways businesses can quickly obtain working capital and have enough cash available to cover the increased operational costs associated with the acquisition of a federal contract.
The reason why pretty much any contracting company will qualify for this type of financing is simply because when a lender underwrites the application they consider only the creditworthiness of the invoice holder.
The United States government has never defaulted on any of its financial obligations and approval process for factoring federal contracts doesn’t take a lot of time or paperwork.
A lot of these businesses will either factor their invoices, or use some other financing mechanism in order to obtain working capital required to cover the increased cash flow needs.
Not all lenders factor government contracts and not all value them the same.
Orumfy can connect you with the right lending partner so you can get the most cash for your contract at the lowest rates.
How does government contract factoring work?
It is quite common that even though government contracts do pay well, and revenue stream they generate looks great on the balance sheet, they do require a ton of capital upfront to fulfill.
The information in the graph, published by Washington Post, shows that almost 9,000 small businesses provide services to the federal government on the weekly basis, with contract price ranging from $1,000 to $100,000.
When a business decides to factor it’s government invoices, it basically sells them for advance payments to a financial institution.
Once the invoices have been confirmed by a government agency, the funding company will immediately release the cash to provider the services.
Advance payments range from 70-90% of the invoice amount.
The rest is called reserve, which is released, minus the factoring fees, once the invoices are paid.
What is the difference between factoring and contract financing?
Factoring your invoices allows you to sell your invoices selectively, and get paid the balance, minus the cost, in some time once the financial institution funding your company collects from the invoice holder.
You can finance costs incurred during the contract, as they arise, and not have to pay interest on the entire amount right away,
With government contract financing, a lending institution will provide funding, secured by your contract, for the total amount approved during underwriting.
Then the funded business makes regular financing payments to the lending company, until they themselves collect on their invoices for the contract and settle.
Loan guarantees are typically required in such cases, to ensure that the borrower will pay back the loan once the it gets paid on the contract.
We usually only recommend to finance the whole contract with a loan when you need a lump sum amount of working capital to get started, that a portion of the invoices sold just simply won’t cover.
Line of Credit
Business line of credit could be an excellent choice for government contract financing, as it allows businesses to draw on the line as they need the funds, and not pay any interest on the full line of credit approved for and not in use.
What makes it an even better choice sometimes, as for some types of contracts issued by the government, a business can qualify for a secured line of credit, with much lower cost of capital.
Normally with secured lines of credit require lenders require applicants to pledge assets as collateral.
In certain cases of government contracting, the contract itself, positive past history of contract execution coupled with loan guarantees may qualify the applicant for a secured line and save a lot of money in the process.
Orumfy’s specialists are will help you navigate through the complicated web of options that are available to you to help you finance your government contracts’ operational costs.
Purchase Order Financing
Clients such as the United States Federal government pay well and order a lot.
And when it comes to the its appetite for goods, there is no small order.
Contracts usually have such financial values, that most small businesses lack the capital to deliver.
That’s where contractors can turn to purchase financing.
Funding companies will pay your supplying manufacturers for goods and wait to get paid by the government agency for your invoices.
Rates vary based on the size of the order and the reputation of the suppliers.
The “Assignment of Claims” law made that possible.
Under the “Assignment of Claims” Act the law allows contractors’ revenue generated from government contracts to be assigned to another party.
Here is how it works:
You sign on with a financial company to demonstrate to the senior procurement executive who will be reviewing your file, your ability to fulfill the order, if contract is to be awarded.
Your company receives a government agency issued purchase order for goods.
The finance company pays your supplier directly.
Goods delivered to the government by your supplier.
You invoice the government.
Once the government pays the invoice directly to the financial company the purchase financing contract is settled.
also known as
Supply Chain Finance
When you win the contract to supply goods to the United States government, you have an option to work with a finance company not to overburden the your cash flow and be able to cover the added costs associated with procurement of the supplies ordered, on time and according to regulations and contract terms.
In this financial arrangement, you place the order for commercial financing with the finance company, which then in turn, places a corresponding purchase order with your supplier.
The financial company in essence extends you credit until the completion of the contract and the delivery of goods.
Contract financing payments to your supplying manufacturers take place according to terms agreed to between the financier and the supplier.
While Orumfy works with a number of lending institutions specializing in financing government contracts and while their qualifications criteria somewhat differ from one another the list below will give you and idea of what’s expected.
You have to be a manufacturer or a distributor
Have at least two million dollars in annual revenue
Operate for at least three years
Have Product Liability Insurance
Be ready to provide the following financial statements:
- Balance Sheet
- Profit and Loss Statement
- Accounts Receivable Aging
- Accounts Payable Aging
- Cash Flow Statement
The Small Business Administration offers many programs to fund small businesses across the United States, and it’s an effective way fund government contracts that allow contractors time to secure financing after the contract has been awarded.
Previous history in contracting for the government will play a key role, as well as all other relevant SBA guidelines.
You can learn everything about SBA Loans here.
Asset Based Lending
Asset based loans could be least expensive ways to finance government contracts, yet a lengthy one.
An asset based loan as the name implies is secured by the assets held by the business and must provide adequate security blanket to the lending institution to offer low rates and longer terms.
Generally businesses who qualify have clean history and good credit rating.
Asset based loans usually have a $750,000 - $1,000,000 minimum utilization requirement.
Pledged assets can be receivables, inventory, equipment or real estate.
The amount you can borrow generally lies within 75-85% range of the assessed value of the assets used to secure the loan.
Orumfy works with a unique network of private asset based lenders, that allow us to procure working capital for our clients against their assets at the lowest rates, and in the process allow our customers to save, reinvest and grow their business.
Who should apply for contract financing?
From food delivery to construction contracts to defense equipment, and everything else in between, the United States government remains the biggest customer in the world and with the best payment history.
Bidding on government contracts is no longer the time and money suffocating process it used to be.
Any company that has secured a government contract and is in need of commercial financing in order to pay for the costs incurred associated with that contract, should consider applying for government contract financing.
Orumfy is here to make this process finally simple.
We not only show your the best options available to you today, but also help pave the road for the future and work with you every step of the way, to get your the best rates, biggest amounts and longest terms available for government contract financing.
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