What You Need to Know About Financing Government Accounts ReceivableBanks that are not familiar with U.S. government accounts receivable will not typically finance them because of all the rules and regulations contained in most government contracts, and the belief that it is hard to collect from the government. In addition, most banks will not finance a single customer that represents more than 20 percent of a company’s total accounts receivable.  The challenge for many government contractors is that if they do most of their work with the government, they will probably never be below that 20 percent threshold.

While this situation can seem daunting, help is available.  The important thing is to make sure you are educated about bank requirements and your options.

Who should I speak to about financing government receivables?

Find a bank or niche lending company that specializes in government accounts receivable.  For companies in the Washington, D.C. area, this will be very easy because most banks have a specialty unit that deals with government receivables. Companies outside Washington, D.C. can speak with a large national bank or a mid-size bank that has a niche in understanding the intricacies of government receivables.

What are banks’ concerns about government receivables?

First, there are a number of methods contractors can use to bill the government. For instance, contractors may receive advance, progress, or performance-based payments. Most banks will not lend against advance payments because the work is typically not yet performed, nor will they lend against progress payments because the bank would be at risk if the contractor is unable to fulfill the task. Performance-based payments are based on completed work or shipped products so bankers are more willing to lend on these receivables — typically 80 to 90 percent of the invoice amount.

Additionally, it can be difficult for banks to “assign claims” from the government. The assignment of claims is a federal law that allows and specifies the procedures for assigning financial rights to invoices of government contractors.

The Federal Acquisition Regulations contain many rules and regulations by which government contractors need to abide. If any are not followed, the government typically has the right to withhold payment on submitted invoices until the problem is rectified.

Do I need to provide the necessary working capital until amounts are billed?

Not necessarily. Most banks that have experience in this area will lend up to 50 percent of costs expended plus estimated profit for amounts not yet billed. However, in most cases, the contractor has to request such advance rates because banks rarely offer this in their initial dealings with a contractor.

What about factoring government receivables?

Factoring is “selling” the accounts receivable to a third party that collects the payment from the government. Many start-up companies that have limited working capital will find a niche firm that will factor government receivables to mobilize a contract until they have sufficient working capital to finance it internally. Factoring is typically much more expensive than the traditional financing discussed above. To find a lender involved with factoring government receivables, you can simply conduct an Internet search for “Factoring U.S. government accounts receivable.”

How much working capital is typically required for a government contract?

The amount of working capital required depends on the terms of the contract and the goods and/or services being provided. Performance-based contracts are the government’s preferred method of contracting. These are typically billed monthly for goods and/or services delivered.  “Good” contractors will typically be paid 45 to 60 days from the date of the invoice, but initial invoices for new contracts usually take longer to be processed through the system.

Will the government finance the accounts receivable?

In some cases, the government will provide advance payments and/or progress payments against specific contracts. However, due to the high degree of risk, advance payments are the government’s least preferred method of contract financing. FAR Part 32 discusses the process to obtain contract financing from the government, and FAR Part 52.232 discusses various payment methods.

David E. Shaffer can be reached at Email or 215.441.4600.