By Keith Gilabert
One of the biggest
challenges a new company first encounters is funding payroll on a government
contract. When a business first captures
a contract with the government it could take anywhere from 30-45 days before
you can get paid.
Often times the funding
could take longer than 30-45 days following the submission of your first
invoice. If the contract specifically
states you need a receiving report it could take the government office 2-3
weeks to submit the report and then the government finance office could take
another 2-4 weeks to cut the check. That
is almost 2 months without getting paid.
What makes government contracts
so lucrative is the size. No enterprise spends more money than the United States Government. The profit
margins on average are between 5-7%, but the average contract is
$150,000.00, so if you can secure 2-3 contracts per month you will have a very profitable firm. The problem is you will be
out $150k waiting 2 months to get paid.
A way to work through this is by getting payroll financing.
The
government requires that all Invoices must be submitted on the 1st of the
month. But your first invoice cannot be submitted until you’ve had 2 payrolls
and in most cases, payroll is made on the 15th and the 30th of the month.
You
should be aware that there are exceptions to the length of time it takes for
payroll. Things can happen that may hold-up the payment process. I’ve seen
invoices get hung up in the system to anywhere from 90-180 days from the
submission of your first invoice, depending upon the cause for the hold-up. This is rare but it does happen.
Be
prepared to wait it out in the beginning and have the financing in place to
keep you and your employees afloat. You may find that you have to wait a full 5
payrolls before finally getting paid. When contracting for the government, you
want to fully understand what you’re getting into and you want to ensure that
you have the right lender to fund your contracting project(s).
Choosing
the wrong lender could lead to untimely problems for both you and the lender,
because lenders who are not familiar with government policies regarding this
type of funding typically end up a thing of the past.
Exceptions that Could
Cause Slow Payment
These are a few problems
that could arise causing slow payroll funding for government contractors:
·
A Contractor Not Invoicing Correctly
·
A Lost Invoice
·
Misdirected Payment
·
Payment Office Relocation
·
Depleted Funding
·
Redirected Funding
The
most prevalent reason for slow payment is the failure on the part of the
contractor to submit their invoice correctly according to the contract. When
taking all of these slow payment factors into consideration, it’s important to
know that these problems very rarely affect commercial contractors.
Lender Problems when
Slow Payment Occurs
Choosing
a lender that is not experienced in dealing with the federal government could
lead to financial distress for both you and the lender. This is because the
lender expects to receive payment in an allocated amount of time.
If payment is held up
due to an invoice issue or any of the other reasons listed above, the lender
suffers a financial loss and it could also affect future funding for the
contractor by the lender. This then has a domino effect and could harm the
contractor’s relationship with the government client if the money is not there
to complete a project.
When a project is not
completed on time the contractor will suffer a low rating from the government
which will affect your ability to attain any future projects.
Choosing an Appropriate
Lender
When you need to select
a lender to fund a government contracting project, you want to make sure to
select a lender that is familiar with government payroll funding. This is not a
cut-and-dry process. There is a lot of paperwork involved and government
regulation to take into consideration.
During
the lender selection process, you need assistance. Seeking out the assistance
of an expert who can help you connect with an appropriate lender will eliminate
future problems and ensure that all of the required paperwork is in order for
timely payment.
To learn more
information regards to funding for government contractor, contact us today.
