Nearly every newcomer to commercial or government contract factoring as well as to asset based lending services worries whether or not their business will be stigmatized because it is using these specialty finance services. Quite the opposite is true. These are such commonly used forms of financing that a professionally delivered specialty finance service rarely draws much notice from customers. Ironically, the bigger and more sophisticated the customers are, the less likely they are to care or even notice that a supplier’s invoices are assigned to a finance company. It just gets routinely handled in accounts payable.

If it is true that commercial invoice factoring or asset based lending is this commonplace, then it can be said that it is virtually mainstream to use government contract factoring.

There are three reasons government contractors are more common and extensive users of alternative financing options:

  1. The affirmative action or “set aside” programs the government provides offers preference to small and/or disadvantaged suppliers. These programs allow qualifying and certified businesses to win larger contracts than their circumstances would ordinarily allow in a free and open competition. These business circumstances test the limits of conventional credit guidelines.
  2. Government contract factoring and asset based lending are more commonly used than their commercial counterparts because of the government itself. The government’s enormous burden of special regulations, policies, rights and practices makes government contracting unattractive to most banks. Only banks that are active in significant local government contracting markets maintain the experienced staff to manage this very technical and specialized lending environment. And most banks - even large ones - prefer to do this specialty lending only in markets where their industry expertise is local.
  3. The size of government contracts can cause sudden, extraordinary growth spurts and concentrate most of the borrowers’ business in very few or even one huge contract and customer. These conditions are difficult for conventional lenders to handle.

For these reasons, government contractors turn to specialty finance companies outside the banking community even more than businesses selling to other businesses. They absorb the tremendous growth opportunities with highly responsive and open-ended government contract factoring or asset based lending services and, when growth slows and systems and profits catch up – as a much larger company - they “graduate” out to more conventional and very inexpensive bank financing.