Here is a typical scenario of a company who has been trying to enter into the government contracting space. They have been struggling for a couple years having meetings with contract officers, identifying agencies who might be interested in their product or service. Meanwhile the owners are using whatever resources they have available to keep their company somewhat viable. This creates a real drag on the financial condition of the company as they try to win task orders and awards.
Finally the day comes when they receive a contract award, which unfortunately doesn’t start right away but will ramp up quickly once it does. This can leave the contractor in a vulnerable position. Due to the weakness in their balance sheet and income statement, qualifying for a bank loan could be a non-starter.
So how to access ongoing working capital on a regular basis to help fuel the new contract? This is a very good question for which receivables factoring is probably the best answer. Using factoring to provide the necessary capital to perform on the contract will increase the likelihood of more contracts in the future. By leveraging the accounts due on finished work to pay off labor and bills a contractor will keep the CO satisfied with the contract outcome.
Knowing which tools to use for the situation at hand is a sign of good mature management.