Two Ways to Finance Your Government Sales

The U.S. government buys billions of dollars worth of products and services from commercial companies every year. This has held true even during the credit crunch and recession of the past few years, making government sales one of the more attractive opportunities during the past few years. In response to this trend, a number of companies have started or grown their government sales departments.

Generally, government suppliers are either selling products or services. The financial challenges that these two types of suppliers face are different. Product suppliers need capital to purchase goods, that can then be resold to the government to fulfill their purchase order. Service suppliers, on the other hand, need to cope with the fact that government invoices can take up to 45 days to pay after delivery of service, which affects cash flow.

Unless the company is well capitalized, government suppliers will need business financing to be able to meet their obligations and grow their companies. One alternative is to use a business loan to improve cash flow. The challenge is that business loans are difficult to obtain in the current financing environment. Most financial institutions will require solid financial statements, showing at least a couple years of profitable operations. Additionally, the company will need to have substantial collateral. Few companies can meet this criteria.

There are two alternative forms of financing government transactions that have been gaining traction in the past couple years. They are purchase order financing and factoring financing. These two financial tools are available to most government suppliers.

Purchase order funding solves a common problem for government suppliers that sell products - how to pay your suppliers so that you can fulfill your government purchase order. It solves this problem by paying your suppliers on your behalf, and then settling the transaction with your company once the government pays for the goods.

Factoring, on the other hand, solves a different problem. Most government service providers need to wait up to 45 days to get paid for their services. But few can afford to wait that long because they have obligations to meet, such as payroll and rent. Invoice factoring provides an advance against the government invoice, providing the liquidity your company needs to meet its obligations. This transaction is also settled once the government pays the invoice.

Both of these alternatives are easier to obtain than conventional financing and have the flexibility to grow with your business. To qualify, your company must have viable government purchase orders, decent margins and be free to liens and judgments.