Federal, state and local governments create millions of dollars worth of business opportunities for small businesses each year. The opportunity is even greater for businesses that have attained a preferential status of some sort. Once a small business gets approved and set up as a vendor to a government entity it becomes fairly easy for them to get plenty of purchase orders to supply the government with goods and services.

    Once the purchase orders are in hand the challenge becomes financing the delivery of these goods and services while managing cashflow during the 45 or so days it usually takes to receive payment. Depending on the company’s size and credit history a supplier of products to the government may not be able to get credit terms with their own supplier. In the case where services are provided the contractor has to carry the cost of those services including payroll. Due to the unlimited opportunity most government contractors have and the costs of taking advantage of that opportunity many small business owners have found factoring to be a very valuable financing tool. These financial services are most helpful when a business is first starting doing business with the government or when growing their government business or when a contractor receives a large order from the government.

    A factoring company likes to purchase invoices from government contractors because the credit risk is very low. The main thing to consider in seeking purchase order funding or factoring for your government purchase orders is the profit margin you will have on each transaction. The fee on a purchase order transaction can be 3% to 6% or more and factoring can cost that much as well. Many times there is not enough profit in the transaction to cover all these fees and leave a reasonable profit for the contractor. Where there is enough profit to cover the fees the combination of both purchase order financing and factoring allows the contractor to get and fill orders as fast as they can. This means the contractor can grow their business rapidly and if their piece of the profit is reasonable move quickly to financing the business internally in a few years.

    In transactions where the profit margins are lower, the factor may have the ability to help the contractor convince their supplier to extend them favorable credit terms or offer a discount to help defray the financing costs. They may be able to act as an intermediary in the transaction that gives a supplier confidence that the goods will be paid for. Many small business owners have used PO funding to finance government contracts successfully grow their business. If you are a small business who does business with the government contact us today to see how purchase order funding and factoring can help your business.