Businesses that work with the federal or local government will find that these partnerships are ideal for receivables financing. When a factoring business considers whether or not to work with a particular company, they mostly consider the credit worthiness of the invoice holder. If their credit is good, then chances are good that a Factor will agree to purchase a company’s invoices. On the other hand, if a company’s clients have poor credit scores, a Factor will not be willing to take on the risk. The government is generally a great customer. They have deep pockets and they mostly pay on time.
A business may sell their receivables for any number of reasons. They may need money to pay their bills. A business may be interesting in growth but doesn’t have the available funds to finance it. They may need to purchase materials in order to complete a job. There are many possibilities. For those with government contracts, the process is typically very easy. Because a Factor will most likely view the government as a reliable bill payer, they are apt to hand over the money for the receivables.
When government contracts or jobs are particularly large and have to be financed by a company upfront it can be very difficult for some businesses to come up with the money. Having to pay personnel and buy materials for the job, if needed, can be very expensive, especially since the government won’t send payment until after the job is complete. Because a business will have other expenses that must be paid, this can make for a very difficult and stressful time. A company must find a way to come up with the money in order to fulfill the contract. When a business loan is not available or desired for this purpose, one excellent option is receivables factoring.
Receivables factoring is a form of financing that involves a Factor purchasing the receivables of a business. This is money owed to company based on the delivery of goods or services that have already been completed. The Factor will purchase a company’s receivables at a discounted price, typically between 70% and 90%. This money is paid often times within 24 hours and can be used by the company for whatever they want. They may pay their bills with it, cover their employees’ salaries, buy materials or fund expansion. After the money is paid, the Factor will then begin making arrangements to collect on the receivables. All terms agreed to by the original company stay in place.
Once the Factor has collected the receivables, they return this money to the company which they purchased the invoices from, minus the agreed upon fee. Both parties benefit. The business selling the receivables is able to secure much needed money and the Factor is able to be compensated for collecting the receivables.
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