Government Contracts and the Need for Working Capital

July 30, 2014

ad-dealstruck-square*This article was contributed by Wilson Galyean, Dealstruck Inc., a corporate partner of NSBA.

Government contractors often face financial strains due to the delay between expending working capital and receiving payments from clients by invoice, often not receiving payment for 60-90 days post performance. The need for working capital to perform on these contracts, cover operating expenses during the waiting period, and execute upon other projects makes any business with small margins susceptible to regular cash shortages.  Short-term financing can be quite helpful in the interim, but it is important to understand your options.

Factoring versus a Line of Credit

Utilizing an Asset Based Line of Credit secured by the business’s Accounts Receivable (A/R) is a common solution during these periodic shortages. Unlike factoring, where entire invoices are purchased from you at a large discount, a Line of Credit allows you to draw on only the amount you need.  A line is also a true credit product, which allows you to build your credit over time, whereas factoring is not.

As an example, let’s say a contractor has $100,000 of outstanding A/R that will be received steadily throughout the coming month, but needs $50,000 to cover payroll on the first of the month. Using an Asset Based Line of Credit, the owner can draw the $50,000 for payroll, and as the month progresses, that $50,000 debt is steadily reduced.  If there are no other cash needs, then the principal is paid down as invoices are collected.

Alternative Lending vs. Bank Financing

While bank financing always offers the best interest rates, the primary drawback of applying for a traditional bank loan is that there is a significant delay between applying, getting approved, and then receiving funds. To minimize risk, traditional banks use extensive underwriting processes that can often take up to three months for an approval decision. When it comes to the particular problem of managing cash shortages between pay periods, bank financing cannot always meet your timing needs.

If you are securing government contracts, it is important to determine 1) how much you will need to meet demands until your invoice is paid; and 2) how quickly you’ll need that financing.  If you have questions about your options, please email us today. Or simply call 855.610.LOAN (5626) M-F, 10:00 a.m. – 9:00 p.m. EDT.