Working on government contracts can be extremely profitable and lucrative, but until you are paid, you may be at the mercy of your creditors. In many cases, waiting on a government contract to pay up can drain all of your working capital in the interim. Because of this need that many companies have, many use government contract factoring to generate the revenue they need.
Government contract factoring is a process that involves getting an advance based on the value of a government contract. When you enter into a contract with a government agency, you typically have to provide the materials and possibly labor without receiving any payment upfront. Once the work or order has been completed, then the government agency will take your bill and pay it on their terms. This can sometimes take as long as 90 days for you to get the money that you are owed. With government contract factory, you would take that invoice that you have approved from a government agency and then give it to a factoring company. The factoring company would then give you a cash advance based on the value of that invoice. When the government agency pays its bill, the factoring company is paid back and you receive the rest of the money that you are entitled to.
When you facilitate a government contract factoring agreement, you work with a factoring company that provides advances on these types of invoices. The factoring company will evaluate the invoices that you want to factor and then make an offer for a cash advance. The cash advance will typically be less than the value of the invoice. When the government entity pays the invoice, the factoring company then gives you the rest of the invoice after taking a certain amount of money out of the payment.
One of the reasons that companies use factoring is to generate cash flow when times are tough. Instead of having to wait for months on a payment from a government agency, you can get the cash you need now and use it to conduct other business operations. This makes it possible for you to come up with the money you need for regular business operations without having to worry about going out of business or borrowing money in the form of a loan.
Another reason that many companies use this type of advantage because it is not based on a company's credit profile. The factoring is based on the credit of the government that is paying the bill. This makes it possible for companies that may not have the best credit histories to still get access to the cash they require.