government contract

Effective Benefits of Purchase Order Funding for Government Contracts

July 13, 2020

Many small business owners and operatives find it profitable to sell products and goods to the US government. Companies that have contracts and agreements with the government often lack the cash to deliver their products. Product agreements have great values that transcend the financial capacities of government vendors.

These small businesses and companies go through the dilemma of how to get orders and be able to complete them. Purchase order funding plays a great role here to fulfill government contracts.

WHAT IS PURCHASE ORDER FINANCING?

Purchase order financing or PO financing is basically an option of funding for businesses that need cash for multiple or single customer orders. In several companies, the cash flow problem does exist and becomes a very pivotal issue with the growth and development of the company and the business. In fact, sometimes there will be situations where there is not enough money to cover the costs of running a proper business.

There may be orders from different clientele that you fail to complete due to cash problems, sometimes you might not have proper resources and supplies that are needed to meet the client’s needs. This would lead you to turn down the order of the client which would negatively affect the revenue and the reputation of your business.

The process of purchase order financing is pretty simple and clear. PO financing has one company paying the distributor and supplier of another company, for stocks and commodities that have been ordered to complete a job for a client. It is basically an advance.

This financing may not be for the complete amount and bill of the supplies, but it covers a good portion of it. But there are some cases where businesses could be eligible for 100% financing. Purchase order financing for startups and small businesses that are new is a great way to boost your business.

Purchase order funding is a financial instrument for gaining funds from purchase orders. It is a short-term option. In purchase order funding, the financing company or the factor makes a payment or guarantees to pay your distributor or supplier for the products they supply.

The finance company directly pays the supplier and this leads to the goods being supplied to you. Once you create and make incomes from the sales completed from your clients, you can complete the payment for purchase order funding. Sometimes, the factoring services and purchase order financing are merged to decrease the total cost of the transaction.

Also Read: Differences Between a Purchase Order Loan Vs Purchase Order Financing

BENEFITS OF GOVERNMENT PURCHASE ORDER FINANCING

There are many benefits of government purchase order financing and funding. Some of them are as follows:

GOVERNMENT CONTRACTS FOR SMALL BUSINESSES

Many small companies get skeptical and try to run away from government contracts because they believe that they are financially weak and fragile. The working capital may not be available to many businesses and companies. Working capital is needed to buy materials to finish a government order or job, and it is also required to meet any financial duty to continue with any ongoing projects.

Sometimes companies don’t even bother to look for any factors that might help them, some of them put themselves in a place of competition for government contracts by trying to take out a loan and look for other alternatives. It sometimes works and many times does not, maybe because of the criteria of positive credit history and the pressure of running the business for a particular time.

In all these cases it gets tough to qualify for a traditional bank loan. Purchase order financing is one important tool for small businesses to manage a government purchase order even if they don’t have the cash to buy the raw materials.

EASILY AVAILABLE

Another benefit is that it is easily accessible and available than a bank loan. Purchase order funding gives businesses a secure way to get all the materials they require without using any cash of their own, to fulfil the government contract that needs the manufacturing of some goods and products.

Purchase order funding works brilliantly for companies that are doing business with the government. Government receivables are sometimes excluded by many accounts receivable funders and banks. Many factors know the nature of getting paid and dealing with the government. They also understand the Federal Acquisition Regulation (FAR).

Factoring companies know that sales to government agencies and entities are the best way to grow your business. Factors want to be there for your businesses and the company’s working capital requirements.

SETTING UP IS HASSLE FREE

It is also easy to setup. A factoring company or factor plays a vital role in the process of the purchase order. They buy the material a company requires to complete its government contract. Once the business has what they require to manufacture the goods they have been contracted for, and are paid for, they give a part of the proceeds to the factor.

This becomes a win-win case for all the parties in play. At no upfront cost, the factor gets paid; the company gets all the material they require to fulfill the contract, the government gets their work done. For government contracts, the factor lets the companies compete with bigger companies even without enough cash in hand.

IN CONCLUSION

Purchase order funding is convenient and great for companies that want to work with the government, especially those companies that do not have a lot of cash or are generally liquid. They can compete because they have the funding, and they don’t have to borrow money, or running after moneymaking contracts or agreements. A third party will be able to buy the materials they require so that they can provide services to any government contract they are lucky enough to get.

The great thing about this system is that they can repay them completely from the profits they make by selling the merchandise or product. This lets them to not take on new, costly and long term debts. Purchase order financing for startups is a great alternative and a good option for companies interested to work with the government, without using any other traditional and commercial financing option.

So if your company needs funding to deal with government contracts, purchase order funding is your best option.

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