Invoice Factor and Government Vendors
The US government has an act which encourages vendors dealing with government agencies to take advantage of the many benefits of invoice factoring services. This helps them improve their cash flow and, consequently, increase their performance, spurring them towards greater growth and progress. Another reason for the encouragement is to provide a more level playing field for small and mid-sized businesses when it comes to competing with larger companies.
Since all factoring firms accept government receivables, the potential to secure cash is practically unlimited – after all, your account receivables are backed by the good faith of the federal government.
The Assignment of Claims Act of 1986 specifically states that, under this act, any company or government contractor “may assign its rights to be paid amounts due or to become due as a result of the performance of a contract to a bank, trust company or other financing institution.”
Larger vendors have been using this provision to their advantage for many years now. Normally, government purchasers demand a credit of 60 to 90 days; however, it may not be feasible for a small or mid-sized business to wait for that long. In this case, invoice factor may be your best bet. You can simply sell your government account receivables to a factoring firm at a discounted rate and receive a cash advance within 24 hours.
The cash advance is usually in the range of 65% to 90% of the gross invoice amount. The balance amount is called the “reserve,” and is held back until full payments are recovered from the clients, at which point they are forwarded to the business. The factoring company then deducts a factoring fee for services rendered.
Invoice factor is a good option for government vendors to collect their due payments and inject cash into their business. However, keep in mind that you don’t have to factor all of your company’s invoices; some of them can be held back until the end of the credit period. That way, you will not have to pay the factoring fee on all of the invoices, yet you will still have the liquidity to take care of your daily business expenditures.
