One of the leading reasons a small business fails is having a cash flow problem. Even a seemingly healthy business that is profitable and growing can suffer from a lack of funds to meet day-to-day obligations and support rapid growth.
For many companies, a strong banking relationship and commercial lines of credit can help carry a company through the tough times and also help provide funds for growth. Although US government contractors have a credit-worthy customer, they are not always understood by the commercial banking industry and securing credit based on future revenue can be a challenge.
Alternative financing, sometimes referred to as “factoring”, can be a good alternative to traditional bank lending and can also be a good addition to your cash options. The U.S. Assignment of Claims Act allows for assigning payments under a federal government contract to a financing institution. This method of finance is usually provided by private entities and not traditional banks. By assigning your contract payments to a private lender, you can receive quick cash for up to 90% of your invoices. In addition, short-term contract start-up cash can help to meet your working capital needs.
While alternative financing should not be a sole source for funding needs, government contractors will find it an important addition to their cash flow arsenal.