Most companies doing business with the federal government are very happy to have the guaranteed business and payments, but would prefer to be paid much more promptly than the usual 30 to 60 days or more after delivery of goods and services. Especially for a company with a slim operating budget, having a significant amount of money tied up in unpaid invoices can cause serious financial discomfort.

One option which can provide a solution appreciated by all parties is government contract factoring. In factoring, unpaid invoices are purchased by a third party or factor, for an amount less than the actual invoice amount. Part of the difference between the actual amount and the factored amount is a fee paid to the company for the service provided, i.e. immediate payment of the invoice rather than having to wait for a future payment date. The other component to this difference is called a reserve, which in many cases is returned to the original billing company once the invoiced party has fully paid the factor.

This can be extremely helpful to fledgling companies just starting out, with few cash reserves. Cash flow can come to a grinding halt when large amounts of revenue are tied up in unpaid invoices, and being paid something like 80% of the face amount of those invoices as quickly as the next day after invoicing can literally be a make-or-break proposition. 

Not only is the problem of cash flow relieved, but once invoices have been sold to a factor, the factoring company generally then takes on the responsibility for invoice collection, thereby removing another burden from the original billing company. This can amount to a significant savings in clerical costs, since multiple notices and reminders need not be sent to the debtor, and if most of a company’s invoices are factored, it can even allow for fewer clerks working on collections.

All parties benefit by the adoption of factoring as a means of having invoices paid, except the debtor, for whom it is neutral. While the debtor must pay the invoice no matter what, the billing company receives immediate cash value from the invoice to maintain cash flow. The factoring company receives a fee for its service, and makes a nice profit when the invoice is eventually paid. There are precious few financial transactions where everyone comes out a winner, but government contract factoring is one of them.