Factoring Government Receivables

Factoring government receivables is a financing technique that involves a firm selling its government receivables asset for cash. It is a particular instance of the business of receivables factoring. Business Invoice Factoring. Accounts receivable factoring is a financing tool used in a wide range of businesses involving both government and private sector debtor customers.

The parties to a factoring transaction are a business selling or divesting its receivables and a factoring firm buying those receivables. Factoring Government Receivables. The price is usually negotiated at a fraction (or factor) of the stated or book value of the receivables as recorded in the balance sheet. Since government departments have a good receivables payment record, or lower default incidence, compared to private sector firms, Factoring Government Receivables, the price paid by a factor firm for government receivables is usually higher than the price they pay for private sector (non-government) receivables.

A vital need of a business selling its receivables is to receive the cash price quickly. Factoring Government Receivables. That, after all, is a key driver for the transaction. This ability to quickly convert a receivable debt into cash accelerates cash flow and usually allows government contractors to bid on more contracts, win additional work and thereby generate higher revenue and profit. Factoring Government Receivables. Another big bull-point for the government contractor-supplier is that it no longer is burdened by the risk of debtors (customers) not honoring their outstanding invoices (or receivables debts).

Early in a factoring deal, the government contractor will be asked by the factor to estimate the ongoing monthly invoice value it is likely to factor on an permanent basis. Factoring Government Receivables. For the factor, the higher the ongoing value the better. In the factoring industry, the higher the factored value the more attractive will be the price paid for debtors.

Another important point to remember is that a large number of small, higher default risk (private sector) customers will generally be factored at a bigger discount than a small number of large, government customers.

To illustrate the typical parameters of a factoring transaction, consider a government contractor with a debtors balance of $300,000 owing by federal, state and local government agencies with a weighted credit period averaging 60 days before full payment falls due. Factoring Government Receivables. That contractor could be offered, say, $85,000 for those receivables, on a factor of 0.85 or 85 percent. If the offer is approved by the contractor, the debtors will be formally assigned to the factor firm.

The factoring government receivables firm then assumes legal ownership of the receivables amounts, including responsibility for collecting each one from the relevant government debtors. This can be an onerous task. Factoring Government Receivables. It is usually one of the key risks inherent in the factoring business.