Other Options For Factoring Government Receivables
Factoring government receivables isn’t always the best answer anymore. There are new alternatives from online lenders that provide lines of credit that are cheaper, easier, and more flexible. In this article, we are going to talk about options that you can consider if you are looking to finance government receivables.
Summary of Article:
- The advantages/disadvantages of factoring
- The advantages/disadvantages of a line of credit from Financing Solutions
- Other financing options to consider
- Questions you should be asking a Factor
The advantages/disadvantages of factoring
Factoring is when you sell your approved receivables or invoices to a finance company. That finance company will advance you 80% or more of all invoices that they deem to be creditworthy based on their predetermined approval process. The remainder of the advance will come to you, minus the Factors fee, if the government pays your invoice within 60-90 days. Some governmental agencies will allow Factoring while others will strictly prohibit it. Your Factor will be calling your clients to ensure that invoices are valid.
Factoring isn’t cheap and is a long term commitment. When you add up ALL the fees you will be looking at a 20-30% interest rate. You will also find that it is very hard to move away from your Factor. Determining the true cost of Factoring will be challenging due to the various extra fees charged along with many unknown factors like time.
You will find that Factors will not be willing to approval all your clients. In addition, if you are not paid within 60-90 days then your Factor may not be willing to advance the funds. There is also times when the Factor will require the funds to be paid back immediately.
The advantage of Factoring is that you may not have to worry about financing your business and there are a lot of Factoring companies out there to look it. Factoring has been around for a very long time.
In the last few years, some online lenders are now providing lines of credit that are a great alternative to factoring government receivables.
The advantages/disadvantages of a line of credit from Financing Solutions
In the past, the only option for getting a line of credit was applying with a local or commercial bank. However, since 2008 there are now reputable online lenders such as Financing Solutions which offer lines of credit that are a better option for BtoG companies. Financing Solutions is A+ and 5 star rated by the BBB.
A line of credit from Financing Solutions is easy and fast to get in place. There is a 2-minute online application and a written offer will be emailed usually the same day. There is no credit check done for an offer letter.
In order to qualify, your business will need to do at least $400,000 in yearly revenue and the person signing the contract will need to have a 650 or better credit score. There is no collateral or personal guarantees required.
A line of credit is an agreed-upon amount of money that you can access at any time. Financing Solutions does not call your clients as a Factor would. The credit line costs nothing to get in place and nothing when not being used making it an excellent backup plan. The line is inexpensive because it can be paid back whenever you like. Most BtoG companies don’t need to factor all their invoices all of the time so a line of credit is often cheaper.
If you decide that you want to move forward with the offer letter then we will need a few easy to get documents. Once reviewed your line will be in place in 48-72 hours and will be renewed yearly.
The credit line doesn’t have to be used but when it is needed, you will find it to be inexpensive especially in comparison to the problem it solves.
Ron Stack who owns J2K Consulting (BtoG) has been using his line of credit from Financing Solutions since 2016. Ron uses his line often for 1-2 weeks so he can make payroll when a government check has ben delayed.
Other financing options to consider
Local and commercial banks provide business lines of credit and in most cases are the least expensive. However, they are hard to qualify for. You will have to put your house, business assets and other collateral on the line. You will also be required to have a 700 or better credit score.
The application process often is what turns business owners off the most when it comes to banks. The application will take a good week or longer to fill out and it will take months to get the line in place. A bank will want first position and will file a UCC which might interfere with other financing arrangements you have.
A HELOC ( home equity line of credit) is another option. A bank will allow you to tap into the equity of your home allowing you to use the credit line for your business. However, a HELOC can not be written off if it is being used for the business. In addition, if you own your home with someone else, they will also have to sign for the line.
A cash advance should be your last option to consider because it is extremely expensive. A cash advance is from an online lender and is a fixed amount of money that you must take with a fixed payment schedule. You must have a credit score of 550 or better but be careful. The fees will equal a 100-200% interest rate regardless of when you pay it back.
There are a lot of Factors but there are not a lot of Factors that will allow factoring government receivable so that should be your first question.
Your next question should be to ask your clients or to review your contract to see if you are allowed to Factor your invoices.
Another question of your Factor is to ask what their approval process is of your clients. Factors are not really concerned with how good your business or personal credit score is but they are concerned about your clients.
Ask for a copy of the contract that you will be signing and give it to a really good accountant. Factoring contracts are lengthy and are really challenging to understand. The Factoring true costs are much more expensive then you think.
Lastly, do yourself a favor. Look around and get other Factors involved if that is the way you want to go. Even if you decide to move forward with a Factor you should get a Financing Solutions Line of Credit in place anyway. It doesn’t cost anything until used and it is always a smart decision to get a cash back up plan, just in case.
How You Can Win Government Contracts for your Business
Each year, the government awards billions of dollars to companies just like yours. More than 20 percent of these contracts go to small businesses. Whether you have already won contracts or are just starting out, here are some useful tips to increase your success in this area.
Do get your timing right. The government’s fiscal year ends in September and they may be looking to go out to bid well before their fiscal year ends. Make sure you are always aware of bids that fit your business niche.
Don’t cast your net too wide. In other words, carefully research and select which contracts you will go after. Find out specifically what the agency needs and whether you are eligible to apply. There are numerous websites where you can learn what’s available and related criteria. You can also contact them directly and speak to an actual human for more information.
Strategize on how you will win the contract. The cheapest price never wins a government bid and it is always a relationship that wins. Develop strong relationships with the key government contact so you can put your bid in the best chance to win.