Financing the Growth of Your Business By Amy Horn How do you pay your people and your vendors while you’re waiting for your government customers or prime contractor customers to pay? Typically, you have to wait 30-90 days from time of invoice acceptance until those invoices are paid.    Some companies self-finance through calculated growth, shrewd management and stockpiling profits. Other companies are financed through a cash infusion from owners, possibly by tapping into home equity or retirement accounts. It is very rare that a government contractor can grow past a certain level unless it has access to outside working capital — a line of credit.      What if you can’t obtain any or enough working capital from a traditional bank? The answer is A/R financing, also referred to as factoring. When you have quality customers, you can pledge receivables from these customers to a lender. This type of financing is usually faster and more flexible than traditional financing. It’s also more expensive — anywhere from 1.5 times to 4 times what a traditional line of credit would cost you, depending on how much you borrow, how many invoices you generate, and what your credit looks like. The quality of the lender, how long they’ve been in business, and their cost of capital will also have an impact on your rate.    Other important terms that can influence your effective cost of funds are monthly minimums the lender charges whether you borrow or not and termination fees and start-up fees the lender assesses. Pay attention to how a lender calculates its fees. Watch out for lenders that charge you for 45 or 60 days’ worth of interest even if you only actually borrow the money for 30. Also, does the lender charge interest on the net amount you borrow or the gross invoice amount of your A/R? Make sure you understand what you are getting. Walk through examples with the lender so you understand all fees involved.      For cost reasons alone, most companies want to work with traditional banks. However, working with an alternative lender — an A/R finance company or factor — may get you where you want to be quicker. It may also be your only option to make payroll on a relatively large new contract. Think of these lenders as partners; use them as a steppingstone.    A number of our customers have been successful in getting contracting officers to modify contracts to allow them to bill twice monthly. This will help you get paid quicker and reduce your need for working capital. It’s even possible to get a mod after the contract has started. In some cases, you might have to make a price concession to get this mod. But don’t offer a lower price right out of the gate. Your customer might be willing to work with you without any concessions. Your A/R lender might be willing to lend you funds against accrued receivables before you bill, which will also improve your working capital position.      Think outside the box. You never get what you don’t ask for. Shop around. There are a number of lenders that specialize in lending to government contractors. Make sure you are working with a financial partner who understands your business and can help you capitalize on contracting opportunities.   (Amy Horn, vice president of Action Capital, can be reached at amy@actioncapital.com.)