Government Receivables Represent Great Financing Opportunity

With so much attention devoted to SupplierPay, I thought it would be good to see how the government backs up what they preach.

When the U.S. government shut down from Oct. 1 through Oct. 16, 2013, the effect on the government contractor community was swift and harsh. The effect was particularly brutal for contractors providing staff, a big part of the contracting community, such as – landscapers, maintenance, security guards, medical, IT, etc. Firms providing these services have an immediate need for payroll and it may take up to 45 days or more to get paid.

There are a few methods that funders can deploy to fund these receivables.

  1. One is traditional factoring. The invoice is generated, sent to the funder, verified and is purchased and funds are remitted. Factors provide 85 percent of the funds upon approval and then when paid by the government, take their fees and give the residual. The big issue in this method is to ensure procurement contracts allow funds to be assignable. Factors look at the quality of the contract, the quality of the invoice and the quality of payer - in this case, the U.S. government.
  2. The other way is via setting up an asset based lending transaction where funding is provided based on a borrowing base of pooled receivables.

Both the above methods are labor intensive.

Government finance is a growing area. Hitachi Government Finance, a part of Hitachi Ltd, provides working capital so that its clients can finance new and existing contracts and can expand contract opportunities. Hitachi’s clients range from small, economically disadvantaged businesses, to mature, publicly-operated and traded companies that provide products and services to US government agencies, selected local governments, and as subcontractors to prime contractors.

I spoke to Joe Bennett, who runs Hitachi’s government finance unit. He said the biggest issue when financing government receivables is not if you will get paid, it’s compliance with all the rules. Different agencies will have different rules. One difference between working with federal agencies or military bases in Texas versus states or municipalities is that these agencies all have the same set of contract rules. States and municipalities can be completely different. So if you are factoring a government receivable (federal, state or municipal), a funder needs to know the procurement rules.

With so much attention devoted to SupplierPay, it is good to keep an eye on how our own governments pay.

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