28 May Financing Government Contracts – Myths & Facts
Many lenders don’t like financing government contracts, but the reality is U.S. government, state and local government contracts can be financed.
There are many myths out there about financing government contracts. One of the most pervasive myths among business owners, federal governmental contractors, and bankers is that the accounts receivable (A/R) can’t be financed. Many believe that state and local government contractors can’t be financed either. There are many other myths about financing federal, state, county or municipal government contracts. The truth is that it is not very difficult to finance government contracts.
MYTH: Financing Government contracts vs Financing Proceeds
FACT: Governmental contracts are normally not assignable, but the proceeds of the contract (A/R, and cash) are. It is easy to understand why a government contract should not be assignable to another business after a contract award has been made. We do not advocate trying to assigning your government contract to another service provider. However, the receivables from a government contract can be financed. That means a bank or non-bank lender can lend or finance on the accounts receivable associated with a government contracts.
MYTH: Governmental agencies are very slow payers.
FACT: There may be some governmental agencies that are slow payers. However, those are usually for complicated projects involving professional services and layers of authorizations. Some single service projects may be slow pay, but recurring service or supply contracts pay relatively quickly after initially being set up. The good news is some federal governmental contracts are paying for recurring monthly invoices remit payment within 15-20 days.
FACT: The truth is that financing government contracts is as safe as financing any other portion of your business. Though most lenders do not understand governmental contract financing, we can should you safe ways to finance these kinds of receivables.
MYTH: Financing government contracts has too much red tape.
FACT: There is paperwork involved. Financing governmental receivables does have a number of rules and procedures associated with it which is why many lenders won’t finance them. We are experts in small business financing and we know how to work the paperwork so governmental contractors can be financed.
MYTH: No one can loan money against Medicare and Medicaid accounts receivable.
FACT: This is a popular myth among medical and other health service providers. However, there are a few lenders who will lend against Medicare and Medicaid receivables. If this is your business category, please contact us for more information on how this would work for your practice.
In general, know that financing Medicare and Medicaid accounts receivables can be done. The US government has a very special law that makes it relatively easy to finance US Governmental Contracts like these. The law is is known as the “Assignment of Claims Act of 1940”, and it protects the financing source while providing for ways for financing sources to help small businesses serve the US government. Most state contracts can be financed, but these are a little harder due to:
- State governments don’t have a law that protects the lender such as the US Government does.
- State governments can have a number of “offsets that financing sources don’t always feel comfortable with.
FACT: GOOD NEWS! There are plenty of financing options available for companies looking to do business with the Federal, State, County or Municipal governmental agencies. For more information on Financing Government Contracts, download our detailed presentation from Slideshare that provides more detail on financing options for governmental contracts.
Business Finance Solutions has financed over $150 million in U.S. and state government contracts in the last 20 years. If you have questions, contact us for more information online or call us at 512-990-8756.