5 Myths of Receivables Finance for Growing Government Contractors
Due to the COVID-19 pandemic, many companies that had never done business with the government before are getting into contracting for the first time. They are providing a wide range of services– from PPE for medical professionals to construction of necessary facilities to cyber security measures. The process of accessing capital to complete these projects can be complex, leading to many misconceptions about financing. These are the top five greatest myths about receivables finance for new and growing government contractors.
1. Let’s get the contract first and figure financing out at the last minute.
If a company’s contract is in hand and they have not already discussed a working capital solution, it could seriously set them back. Governments treat financing sources in different ways, and many of them have standard clauses that restrict financing types. This is not a problem for large government contractors with substantial bank lines and access to capital markets, but for a company needing financing to get started on providing products or services, realizing these restrictions may exist too late may turn a dream opportunity into a nightmare scenario.
2. Don’t worry, the government will front me.
While this happens in certain scenarios, they are few and far between. More often, contractors will find that a government expects some work to be done or some expenditures generated before anything is billed, and these are not on anyone’s radar for a fast track payment.
3. I can get financing from a bank / any finance company will do it.
Banks do not take potential into account–they are about historical performance and assets–and often say no, even to clients of many years, for a variety of reasons. Even finance companies that are not banks often find it difficult to work under the long payment cycles, intricate billing issues, or regulations of certain government entities, which they may not initially understand if they are not experts. At that point, even someone who initially agrees to finance may pull back when you need them most.
4. My government contacts won’t like it, they’ll think I’m weak.
Perception is not necessarily reality. There may be a perception that receivables financing is complicated, intrusive, or disliked by the government. There may be a perception that if a finance provider talks to your government client, they may be cause disruption. The reality is that your government contract contacts will see your ability to bring the necessary capital from a substantial government financing specialist as tremendously positive. It cements the option that you will fully perform on the contract, which is what matters most to them.
5. Receivables finance is expensive.
While not in the same price league as a mortgage or a bank line, receivables financing is about opportunity costs. Opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” If you are leaving opportunity on the table because you are not armed with financing—financing that ultimately costs but a small fraction of the overall transaction—then not taking the opportunity is the most expensive alternative of all.
As the COVID crisis continues to evolve, receivables financing is only expected to become more complex. It’s important to note that prior experience financing projects may not always apply to government contracting, and it’s a smart move to seek advice from a government financing specialist like Brevet Capital before committing resources.READ MORE »