Thanks to Judy Bradt the owner of Summit Insight, LLC for providing a list of ways to determine whether your business is a good candidate to get into the US Government contracting game. It’s not for everyone, but great for those willing to make the effort. Get in touch with Judy to help build a strategy and implement a plan to go after the biggest customer you’ll ever find.

1. Strong Performance Today & Determination For Tomorrow?
Government customers want reliable suppliers with established track records. Some contracts explicitly require vendors to show a couple years’ commercial track record in order to be considered.

2. A Unique Value Proposition – For Government?
Successful vendors have researched exactly which government buyers benefit most from what they offer, and craft their marketing campaign precisely to reach those buyers. They can articulate in the buyers’ language how their offering stands apart from the alternative options the buyers have.

3. Relationship Mastery?
Successful vendors know that when you sell to government, you’re not selling to a process or an order machine. Government buyers do business with people they know and like and trust, people who understand their needs exquisitely.

4. Focus On Details?
Government buyers use complex rules that vendors must know. Companies who hold government contracts — whether as a prime contractor or a subcontractor — must be aware of and comply with dozens of precise requirements. Non-compliance can bring instant death to a proposal you spent thousands of dollars and weeks of time to prepare.

5. “Know-Who,” Not Just Know-How?
Spend smart, but don’t skimp. Successful contractors engage experts and invest in market research to develop cost-effective government marketing strategies. They’re visiting the perfect prospects — and shaping requirements — long before contract notices are posted online. They shop around for the best insider experts who can help them target the best opportunities, connect them with the right partners and buyers, and plan for critical marketing activities and expenses.

With the worst credit crisis upon us since the Great Depression, institutional lenders have significantly reduced their LTV/LTC’s on loan transactions. This has translated into requirements for increased equity contributions and pressure for seller financing in the M&A arena. The traditional view is that most businesses only utilize accounts receivable factoring to make payroll and pay vendors in a cash crunch, eg. when they reach the limits of their LOC. The picture is actually much broader and especially if a borrower is creative. Factoring companies help close business acquisitions where significant A/R can be financed off balance sheet by converting qualified receivables into immediate liquidity/cash for use in:

• Leveraged mergers and acquisitions
• Turnaround/restructuring situations
• Liquidity events for family-held businesses
• Growth opportunity financing
• Capital expenditure financing
• Restricted working capital and/or LOC ceilings
• Seasonal or cyclical companies
• Specialized industries
• Stock repurchase
• Debtor-in-possession (DIP)/confirmation financing

One requirement for invoice factoring is obtaining a Letter of Good Standing issued by the State of Incorporation. Whichever state the business is currently registered to will keep track of whether the business has paid their annual registration fee. In order for the factoring company to have a legal contract with the factoring client, the client must be up to date on its fees to the state. The result of up to date payments is the Letter of Good Standing. This insures the factoring client is a proper legal entity. A small but very important matter that should not be overlooked.

In any case, it doesn’t pay to miss annual registrations. Getting the account paid up to date will incur penalties and interest.

Invoice factoring companies are limited to purchasing invoices that do not go uncollected over 90 days from funding. Accounts receivable financing typically is for businesses that issue 30 day net term invoices and have a history of getting paid timely. A business model that allows for bi-annual or annual payments may not be a candidate for factoring.

The primary reason for this stems from the arrangement a factoring company has with its funding source, usually a bank. The bank lends money to the factor that makes capital advances to their clients. When calculating the available credit to the factoring company, all outstanding invoices that have aged over 90 days are considered a “non-performing asset” and therefore are deducted from their available credit line. Now there are cases where an errant invoice does go over 90 days. In these situations a recently finished job with a new invoice is swapped for the overdue invoice.

Here are a few distinctions to differentiate invoice factoring from a standard bank line of credit. The cost of funds for a line of credit is going to be less expensive versus accounts receivable financing from a factoring company. But the bank is looking for two financial milestones when considering a loan. The collateral - how valuable, how liquid, and then - ability to make payments, ongoing profitability to service the note. The bank more often than not will ask for additional collateral to secure a line of credit, for example, is there any equity in the homes of the business owners. A factoring company never needs to consider this dynamic. With invoice factoring the value of an invoice is the collateral.

The bank requires verification that the business is profitable enough to service monthly payments on any type of loan. This means a couple years of tax returns and financial statements to see historically what level of loan the business can handle. The factoring company is relying on the creditworthiness of the account debtor (the customer responsible for paying the invoice). As long as the work is being done for a customer with good credit, the accounts receivable will get financed.

The bank will only offer a line of credit for an amount within the parameters discussed above, enough collateral with substantial net profit to make the payments. A factoring company will provide unlimited access to funds through the expansion of new contracts which produce more invoices.

Single invoice financing is also known as “spot factoring.” This is when a company is only interested in factoring one invoice, one time. Most of the time the invoice being financed is a high dollar amount. Generally, factoring companies will not do spot factoring due to the risky nature of the transaction. If there is a problem with the account debtor paying the one particular invoice there will be little or no recourse available. So the first step would be to determine the creditworthiness of the customer who owes on the invoice. Unless they are a household name – a Fortune 100 company, there’s not going to be much appetite to fund. Also a factoring company will look closely at the terms in the contract. Is the language specific enough regarding payment for completed services? But the predominate reason a factoring company will be reluctant to do spot factoring is the amount of work that goes into getting the account started with the client and doing proper due diligence on the client’s customer. A factoring company would much rather rely on an ongoing factoring relationship with a variety of account debtors.

Current market conditions have factoring companies working hard on many new accounts. Because accounts receivable financing is so easy to set up and quick to deliver, businesses are moving right now to get started. But if a business is considering invoice factoring, they need to be accessible. Both by phone and email, the factor can only work as fast as the client is available to answer a question or produce a needed document. In all likelihood, once the phone goes unanswered a few times the factoring company will move on, because there are others ready and willing to get factoring.

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The invoice factoring fee does not accurately compute to an annual percentage rate (APR). Comparing them does not reflect a complete analysis of the accounts receivable factoring transaction. Therefore multiplying a 30 day invoice discount fee by twelve does not reflect a relative rate. An invoice factoring company makes the advance on a 30 day invoice, so they expect to be repaid somewhere between 27 and 45 days. Meaning the risk involved is over a very short period of time, which allows the finance company to make quick adjustments accordingly. This short period is reflective of the risk the borrower brings into the equation. A regular institutional bank on the other hand, will make a loan they expect will be paid over a year or more. They make a calculation the business will be the same or better over an extended period of time. If there is a high likelihood the business might fail and might not be able to pay back the loan, the loan offer will be withheld.

On the other hand, with factoring invoices, the decision to advance funds is primarily based on the creditworthiness of the account debtor or customer. It is the customer who will repay (pay off) the advance (read more here). So when trying to compare an annualized rate with a short term rate, you must at the same time compare a company that can qualify for a long term loan and one that cannot. Those two borrowers are not the same, neither is the yield on financing.

Invoice factoring is a transparent commercial finance transaction between three parties. The factoring company, their client and the account debtor, whereby the client is selling the proceeds of their invoice to the account debtor, to the factor. The client has completed the work and has invoiced their customer, who now becomes the account debtor. The customer owes the client for the work performed. The client is using the invoice as collateral for the advance given by the factoring company.

All this is to say that the customer or account debtor must be notified of the transaction. They are legally part of the three party transaction, even if it is only to send in their check. But by notifying the account debtor they are obligated to pay the factoring company directly which is a critical part of the factoring transaction.

When looking at invoice factoring to help grow a business focus on three main criteria. The first is flexibility. Will the factoring company allow an arrangement that works within the framework of the business model. Whether it is time constraints, period commitments, picking individual accounts, or exit fees, will the factor provide the flexibility to allow the financing to work optimally. The second issue of course is cost. A business that is thinking about accounts receivable factoring as a solution wants to incur the best competitive rates. And lastly, the daily relationship. Unlike a bank loan where a computer program on some unseen server is the gatekeeper to the transaction, with invoice factoring it is a very hands on experience. Each invoice needs to be dealt with directly in terms of creditworthiness, verification and collection. This means regular contact with the factoring company on a host of issues. Knowing that you have a business advocate to help grow the business rather than having a frustrating impediment is as crucial to successful factoring as anything else.

When setting up accounts receivable factoring while there is a bank loan in place will require cooperation from both commercial lenders. The bank, or senior lender, has filed a financing statement (UCC-1) that holds business assets as collateral. A UCC filing on accounts receivable prohibits any subsequent lender from using the same assets as collateral. The bank loan agreements will hold the borrower in loan default. Depending on what collateral was used when the bank loan was initially secured, some or all of the accounts receivable may be released. Usually this would mean some sort of real estate equity is involved. But certain conditions may allow for the bank to release a portion of their security position. A significant pay down of the outstanding note and aggressive payoff schedule of the remaining balance could allow for the factoring company to get involved with support of additional operating capital. This scenario is best when the borrower has been flawless in their monthly payments and communications. The resulting document between the bank and factoring company is the intercreditor agreement.

A basic factoring transaction has 3 parts. First is the “advance,” this is the percentage of dollar amount that is funded initially. It is the percentage of the total value of the invoice. For example, if the invoice submitted is $10,000 and the advance rate is 80% then the advance will be the $8,000. Next is the “reserve.” This is held back until the customer pays the invoice - directly to the factoring company. Once the payment is made then the reserve is released. Factoring companies handle the reserve differently, so be sure to understand what the offer specifies. Some companies hold a semi-permanent reserve, some batch invoices and only release the reserve when all the invoices in the batch have been paid. For example, every Friday our firm releases the reserve for all individual invoices that have been paid during the week.

Lastly is the “discount rate.” This is the fee for funding the invoice. Again each factoring company handles this a little differently. When the invoice gets paid, the discount fee is taken out of the reserve and the balance is sent on to the client. All factoring companies follow this basic concept the same way.

The Advance, the Reserve, and the Discount Rate make up the invoice factoring deal.

Many business owners believe by paying workers as “independent contractors” with a year end 1099 they can avoid the hassle of dealing with payroll taxes. The IRS has cracked down on this activity and the business owner could very well end up having to pay all the unpaid payroll tax with penalties and interest. It’s a gamble that could end up being a huge liability. With unpaid payroll tax, the liability carries through the company directly to the owner(s), forever. The business paying for work to be done is responsible for making sure the IRS is getting their share. The business has either to get verification from its independent contractors that they are indeed making their quarterly tax payments or have the independent contractor form their own company whereby it becomes a B2B transaction and both businesses are set up do their own payroll taxes.

Whether to even consider using a 1099 is based on what is going on between the company and the worker. If anyone at the company is even remotely telling the worker; where to be, when to be there, and what to do, and how to do it – the worker is an employee. The IRS has prepared a 20 item list to help businesses determine whether they should be paying by W-2 or 1099. The good folks at Management Recruiters of Salt Lake City have a page that has the list of 20. The IRS 20 Point Checklist For 1099 Workers.

Factoring companies have to be particularly careful when financing receivables related to agriculture products and services. Thanks to the Perishable Agriculture Commodities Act (PACA) which congress passed for the protection of suppliers and sellers of perishable agriculture products. The factoring company is concerned because the accounts receivable that is generated from the sale of perishable products can be liable to the Act. Like many well meaning laws enacted for the protection of hard working companies, the trouble is in deciphering the fine print. There are potential problems in the interpretation of how the Act offers protection as it pertains to a finance company having to return proceeds paid on behalf of a customer. This is another instance of factoring company specialization. A few invoice factoring companies work primarily with agriculture business and therefore know how to properly interpret the law. To read more detail on how the law works read this article by Andrew Cardonick.

Here is how important deciding who to & how to sell is when it comes to invoice factoring or any type of commercial financing for that matter. When accounts receivable is the collateral for borrowing, the transaction must be straight forward and easy for the factoring company to verify. If the customer does not have a fair to good public credit rating, there will be a problem. If the customer is located in the US, but bills out of their parent internationally, that creates a problem. The work needs to be formally accepted, meaning that it cannot be invoiced today for work that actually gets finished next week. Asking the factor for a credit rating before setting up terms with a new customer for factoring will help. Having customer engagement documents which spell out exactly what is transpiring will help as well. In this turbulent business climate getting business right trumps getting the gig.

Business owners seeking a factoring company should pay particular attention to which industry they operate in. Factoring companies tend to target specific vertical markets. Specialized markets include; construction related, 3rd party healthcare receivables (medicare, insurance company payors), trucking, and small ticket invoices. Each of these particular markets has niche qualities to them that require extra knowledge and responsibilities. These markets have over time developed groups of accounts receivable finance companies who fund clients operating in special industries. When calling on a factoring company, if the business is specialized, make sure the factor knows at the top of the conversation. Usually if the factor does not fund that particular industry they have a good referral.

All clients of factoring companies should have a handle on their company budgets, including forecasts in order manage their cash flows. Because business costs are rising, it is imperative that the budget analysis takes new and unforeseen expenditures into account. Meet Harvey Goldstein whose company Gohagit works with entrepreneurs with these very issues. “The most immediate and important activity the entrepreneur must be dealing with is the management and predictability of cash flow. The entrepreneur must know in advance what lies ahead” says Goldstein. Check out his site and download his free book “Don’t Bust the Budget, Toss It – How to Increase Profits and Cash Flow by Predicting Your Financial Future” Because access to invoice factoring isn’t enough, the budget still runs the show.

It is very common for government contractors to use invoice factoring to grow their business. Due to the ease of availability, unlimited borrowing power, and how quickly it can be put in place, contractors rely on accounts receivable financing when starting up a contract.

But like everything else with government contracting, using invoice factoring must conform to contract regulations. Typically a contract will state that the work to be performed cannot be assigned to another party, but rarely will the contract preclude assigning the proceeds (payments) of finished work to a third party, like a factoring company.

Using a factoring company to finance a government contract, requires the Notice of Assignment or NOS. Any prime contractor (billing the government directly) with a FAR (Federal Acquisition Regulation) contract will need to have the contract amended to put the NOS in place. Contract regulations require that in order for payments to be made to a third party – the factoring company, an assignment has to be in place that allows the proceeds of the contract to be sent to that third party.

The NOS is normal course of business paperwork and factors can prepare them. The contract officer has to sign off on the NOS. By giving them a heads up, payments will not get bogged down waiting for the paperwork to go through proper channels. The actual content of the NOS is standard so there should not be any legal hurdles.

The misperception of accounts receivable factoring companies is that they are only a source of last resort. It is incorrect to say that after a business exhausts all avenues for capital they should finally seek invoice factoring. The truth is factoring companies do not take all comers. There are plenty of reasons where a factor will turn down a deal. Even though the factoring company ultimately decides to fund on the creditworthiness of the account debtor (customer), the factoring client must show some financial wherewithal. Under funded businesses, poor accounting, lack of proper documentation, unclear billing processes, horrible personal credit history, all can contribute to a negative response from a factoring company. So do not assume that just because there are invoices, factoring is automatic.