How to finance sales to governments?

By Francisco Camargo *

 

Selling to the government does not seem to be that difficult. If the product is good, the company's reputation is good and the prices are excellent, there don't seem to be any major obstacles. After public competition is over, everything seems perfect until it is time to sign the contract and discover that governments also want to be financed by terms of 30, 60, 90 or even 360 days.

 

Right now, MSMEs (micro, small and medium-sized companies) discover that they will need working capital to finance the sale. In Brazil, the most used instrument to finance sales between private companies is the Duplicate Discount, which are drawn (this is bank terminology) against the buyer (the drawee) by the seller (assignor), as long as the transaction takes place between private companies.

 

These duplicates are issued based on a ballast: the sale made. For all purposes, they represent the goods / services delivered to the buyer. With these duplicates in hand, the seller goes to the financial institutions and gives them to the Bank to be discounted. Receives cash, less interest on the sale term. The drawee pays directly to the bank that discounted the duplicates: end of the transaction. 

 

All financial institutions consider trade duplicates to be an excellent guarantee for the financing of sellers (assignors).

 

But if sales financing between companies is a very old and oiled process, for the government this changes radically. With 85% memberships made up of MSMEs - certainly the bulk of jobs in the sector and all startups - ABES (Brazilian Association of Software Companies) has been working for almost three years for changes in the process that make it possible for MSMEs to compete on an equal basis with big companies.

 

In the sale of information technology - the main object of ABES members to governments - the requirement of financing for governments removes MSMEs from this type of sale. Even if the government wants to use the role of inducing public procurement, MSMEs will not be able to take advantage of it.

 

There is no point in the advantage of being able to make prices up to 5% higher in public tenders, when you are a micro company, because the problem is not this: MSMEs may even win public competition, but then they face the harsh Brazilian reality, Governments are also financed by suppliers: https://portalnovarejo.com.br/2017/06/fornecedor-emprestimo/.

 

 

According to Article 58 of Law No. 4,320 / 64, "The expenditure commitment is the act emanating from the competent authority that creates for the State an obligation to pay pending or not to implement conditions". With commitment, the government recognizes an obligation to pay. Unlike sales between companies, when selling to the government, no paper is issued, or rather, there is the "commitment" that is not quite a paper issued from the backing of a commercial sale, as in the case of duplicates between companies. 

 

The company winning the bidding finds itself in a difficult situation: it has won the competition and is unable to obtain working capital or even provide guarantees for its suppliers to finance it to make the sale.

 

What ABES has suggested to the federal government is that the government transform the sale to the government, the purchase and sale contract and the expenditure commitment into a ballast for commercial sale, with the possibility of issuing a “commercial paper”, endorsable and with liquidity.

 

It would be a type of e-Gov-Purchase-Confirmed, in which the seller received this “mercantile paper” that could be discounted, ceded, given as a guarantee, as if it were a duplicate.

 

It would make government sales more egalitarian, allowing more companies to participate in public tenders and possibly reduce costs.

 

The entire buying / selling cycle would be controlled by government systems, which would know at every moment what happened to their Confirmed e-Gov-Purchase-Orders.

 

It would be a real revolution in public procurement and the image of the government. Evidently everything would be digital, with digital signature by e-CNPF or e-CNPJ.

 

 

* Francisco Camargo, Production engineer from Escola Politécnica da USP, Entrepreneur, founder of Grupo CLM, is president of the ABES Deliberative Council