Last Updated on October 28, 2022
Government contracts are often lucrative and make you a lot of money, but they often take a long time to pay. Lengthy payment cycles and late payments can put your business in a cash crunch, leading to a frustrating cycle of negative cash flow and increasing debt.
To keep growing your company and win more government contracts, you need cash to cover expenses, provide goods or services, and pay your staff. Invoice factoring, also known as accounts receivable (AR) factoring, can solve this issue by providing cash advances.
In this article, we discuss how invoice factoring for government contractors works, its benefits, and how it compares to other financing alternatives. Read on to learn how altLINE’s government contractor factoring services can grow your business and help pay your expenses!
What Is Government Contractor Factoring?
Government contractor factoring is when you sell unpaid invoices to a third-party company like altLINE for cash advances. Government clients often pay you with invoices, so there may be delays in receiving the money – often resulting in negative cash flow that hurts your business. Government contractor factoring is often used to access working capital when needed, instead of relying on prompt customer payments.
Benefits Of Factoring For Government Invoices
altLINE’s government invoice factoring is a great way to unlock funds by covering delayed customer payments. Check out how factoring government receivables can help you access cash when needed:
Get Your Invoices Paid In Days, Not Months
The best government contract factoring companies fund invoices within 1 or 2 days. This means you can get up to 90% of your earnings ASAP instead of in 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
Sometimes, business owners must sacrifice equity and assets to fund business growth, but invoice factoring can set them up for long-term success. Government contractor factoring provides you with the cash necessary to fund growth initiatives without sacrificing assets or equity.
Get Cash When You Need It Most
Overdue invoices and late customer payments typically result in negative cash flow that hurts your business. Invoice factoring gives you a more predictable cash flow, ensuring your business stays financially healthy.
How Does Government Receivables Factoring Work?
altLINE’s government receivables factoring works by turning unpaid invoices into cash for funding business initiatives and paying obligations. Submitting government invoices to factoring companies like altLINE also softens the blow of late customer payments. Instead of waiting on government clients to pay their invoices, you can use invoice factoring to get cash whenever you need it.
Here is a quick guide to getting a cash advance from altLINE’s factoring services:
Submit Your Unpaid Invoices
altLINE accepts all kinds of unpaid government invoices for factoring. We generally favor creditworthy customers from established companies over ones with limited credit history.
Government clients are usually creditworthy and well-established, so we will likely approve most submitted invoices.
altLINE Advances Up To 80-90% Of The Invoice Face Value
You can generally expect a factoring advance rate of up to 90% of the invoice’s face value and receive the cash advance between 24 and 48 hours after submission to our government contract factoring company. The exact timing may vary depending on job completion and receipt of goods or services.
altLINE Helps Collect Payment For Your Outstanding Invoices
altLINE assists you in invoice collections by providing a safe lockbox for customer funds and reporting payment progress through an online customer portal. If issues arise, we can communicate with your government clients to resolve them professionally, ensuring you maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
Once we finish collections and deduct our factoring fee (typically 1-5% of your invoice), we will send the remaining invoice balance to your bank account.
Uses For Your Factoring Cash Advance
Receiving cash advances from government contract AR factoring means you do not have to wait on customer payments to improve your business. Instead, you can avoid lengthy payment cycles and unlock growth capital sooner to accelerate business growth.
Here are some ways you can use government contract factoring cash advances:
Paying your employees on time maintains their satisfaction and productivity levels. Unfortunately, late customer payments often lead to delayed payroll, which causes productivity drops.
Government contract factoring provides cash advances to ensure you make payroll on time, preventing staff satisfaction and productivity from dropping.
Take On New Orders
You should not be forced to wait for government invoices to clear to take new orders and grow your business. Invoice factoring helps you afford the things you need to accept and complete new orders without selling valuable business assets or equity.
Pay Operating Expenses
It can be tough to pay expenses like office rent, building maintenance, and utilities with bad cash flow. Invoice factoring gives you cash advances to pay these obligations without sacrificing business assets or equity.
Government Contractors We Fund And Finance
Government contractors include massive multinational companies and small businesses, and altLINE serves them all. Here are some businesses that may benefit from our government accounts receivable factoring services:
- Stationery providers
- Government auto suppliers
- Document disposal services
- Chemical testing laboratories
- Patent law firms
- Transportation services
- Architecture and engineering firms
- IT contracting
Factoring For Government Contractors vs Other Funding Options
You have a few other alternatives to improve business cash flow in addition to invoice factoring. What are these options, and how do they compare to U.S. government accounts receivable factoring? We compare them here:
Government Invoice Factoring vs Bank Line Of Credit
Most government contractors choose a line of credit as their first financing option. Some contractors can easily qualify for a line of credit, but they may not get enough funds to grow their business.
Banks typically approve your line of credit application and set the lending limit by looking at your financial profile and fixed assets. Depending on what type of government contractor company you operate, you may have enough fixed assets to get a high enough lending limit to fund your business. However, you may be stuck with a low lending limit or have a hard time qualifying if you don’t have many fixed assets.
Government invoice factoring is typically better for companies without many fixed assets because the financing company looks at your customers to provide funding. Government invoices are more likely to get approved for funding because government organizations are almost always creditworthy.
Government Invoice Factoring vs ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans only require bank statements to qualify and provide funding within one or two days. Thanks to their ease of qualification and speed, businesses often use them for a quick cash flow boost.
Unfortunately, ACH and MCA loans come with high interest and lender fees, reaching 60% of your initial loan amount. If you do not know how to manage high-interest debts, your company may experience serious financial issues or even go out of business.
Government invoice factoring is generally safer because you are collateralizing invoices that customers will eventually repay. Because your cash advances are almost guaranteed to be repaid, you can focus on growing your business instead of stressing over debt repayment.
Government Invoice Factoring vs Quick Pay Discounts
In quick pay discounts, you offer lower prices to customers who pay before their invoice is due to encourage faster payments and accelerate cash flow when needed. However, this method heavily depends on what your customers prioritize. If they prefer having good cash flow or more money on hand, they may ignore your offer and decide to pay when the invoice is due, leaving you low on cash and unable to develop your business.
Government invoice factoring is usually more reliable because you are guaranteed to receive a cash advance as long as you’re approved.
Typical Factoring Rates And Fees
Your invoice factoring fees depend on how much you plan to factor and how long customers take to pay. Factoring more amounts and getting customers to pay faster generally lead to better rates.
We also consider other criteria like your time in business, customer base diversity, and customer credit quality.
altLINE splits your factoring fees into two elements:
- Initial fee: This fee pays for your invoice processing expenses for a set initial duration (usually the first 30 days). Expect to pay between 0.90% and 3.50% of your invoice’s face value.
- Incremental fees: These fees cover all cash advance-related expenses after the initial period. Expect to pay between 0.25% and 1.50% of your invoice’s face value per charge. Keep in mind that theses fees are usually in a tiered structure, so the longer your invoice remains outstanding, the more expensive it will be.
Requirements To Apply For Government Contract Factoring
You must apply to be eligible for government contract factoring services. Here is what you need to get approved:
List Of Existing And Potential Customers
altLINE requires a list of your current and potential government agency customers as part of your approval process. While we usually use this list to determine factoring eligibility, most government agencies are assumed to be creditworthy.
altLINE requires all applicants to complete a form for government invoice factoring. We also require you to enclose these documents:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
Accounts receivable aging reports list outstanding invoices based on when they are due. We require this report to research your customer’s payment behaviors and determine factoring eligibility.
We accept almost all government client invoices because we assume them to be creditworthy.
Frequently Asked Questions About Our Factoring Services
Here are some typical questions about accounts receivable factoring for government contracts answered:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all government contractor owners. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to find a government contractor factor that is willing to help.
Do you require UCC filings when factoring government invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is government contractor factoring debt or a loan?
Government contractor factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Do you offer non-recourse government contractor factoring?
altLINE only offers recourse government contractor factoring. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on your customers. To learn more, see our page about the differences between recourse and non-recourse factoring.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.