Government Vendor Financing Alternatives

Government ministries and agencies in Canada purchase most types of products and services that are available in the marketplace. This can provide a great business opportunity for companies that choose to do business with the federal, provincial or municipal governments.

Government organizations can be great clients if you know how to work with them. They buy regularly, often in large quantities, and pay on time. However, government contracts and projects can also have financial challenges. They can strain your cash flow due to their size and payment time frames.

From this article, you will learn:

  • Three alternatives to help finance municipal, provincial and federal contracts
  • Advantages and limitations of these alternatives
  • Why financing federal contracts is more difficult

Do you have either of these cash flow problems?

Most government contracts are paid on commercial terms of 30 to 60 days. These terms can be a challenge for small businesses. You need to have enough money to pay your operating expenses while waiting for your invoices to get paid. This delay can affect you if your company is not well capitalized or if you get a very large purchase order.

Actually, large purchase orders can also create other problems. Large contracts are often seen as great opportunities for small businesses. However, they are great opportunities only if your company has the financial resources to fulfill them. If you don’t have the resources, or can’t get financing, your company could experience cash flow problems and overextend itself.

These two situations – slow-paying invoices and large purchase orders – can be managed by using the right type of financing. And therein lies one important problem: getting financing is very difficult for small and midsize businesses.

The next three sections of this article cover financing solutions that are available to small companies.

Finance slow-paying invoices to improve cash flow

One common problem for companies that do business with the government is that they can’t afford to wait 30 to 60 days to get paid. One way to solve this problem effectively is to finance your slow-paying invoices using invoice factoring.

A factoring plan improves your cash flow and provides your company with funds to pay employees, suppliers and other expenses. It is easy to use and integrates well with most companies.

Factoring works by financing your invoices in two instalments. The first instalment funds up to 85% of the invoice and is deposited to your bank account once the products or services associated with the invoice are delivered. The remaining 15%, less the fee, is advanced once the invoice is paid in full. You can learn more about factoring here.

This solution has a number of benefits, is flexible and is easy to get. To qualify, your company must have invoices from creditworthy commercial or governmental clients, your invoices must not be encumbered and your company must be well-managed.

Finance large purchase orders

One way to handle large orders from government entities is to use purchase order (PO) financing. This type of financing helps companies that are reselling goods and need funds to pay their product suppliers.

Purchase order financing covers the cost of paying your suppliers. This funding enables you to fulfill the requirements of the purchase order and allows you to book the revenues. Purchase order financing is typically combined with factoring, which provides end-to-end coverage for the transaction. You can learn more here.

This solution does have some limitations. It can be used only if you are buying and reselling finished goods from your suppliers. Unfortunately, it cannot be used if you manufacture goods directly. Also, this product works best on transactions with a gross margin above 15%.

Midsize companies should consider asset based lending

Well-established midsize companies should consider using asset based lending to finance operations. An asset based loan allows you to leverage receivables, inventory, machinery and, in some cases, real estate.

Asset based financing lines that use receivables and inventory as collateral are structured to operate like a revolving line of credit. On the other hand, lines that use machinery as collateral are structured to behave as term loans. Companies with mixed assets can use both structures.

Asset based loans are available to companies that have a minimum of $500,000 CAD in monthly revenues. Also, the company must have available assets, reliable accounting controls and good management procedures.

Using factoring/PO financing for federal contracts is difficult

Setting up a factoring or purchase order financing solution to finance provincial (e.g., Ontario) or municipal (e.g., Toronto) contracts is fairly simple. Unfortunately, this is not the case with federal contracts.

Federal contracts require following a process for the assignment of Crown debt. This process can be complex and time-consuming. Furthermore, some contracts may not be assignable.

Because of these issues, some factoring companies may only finance certain types of federal contracts. One way to side-step this issue is to consider using a confidential facility. However, confidential facilities are available only to established companies.

An alternative that is also available to larger companies is an asset based loan. Like confidential factoring lines, these loans don’t require that you go through the assignment process and can work well with federal contracts.

Looking for financing?

Commercial Capital is a leading provider of factoring, purchase order financing and asset based loans. For a quote, fill out this form or call us toll-free at (877) 300 3258.

Note: This article is for informational purposes only and does not intend to provide financial advice. If you require advice, please consult a competent adviser.