Government Contract Financing

How Lenders Underwrite Government Contracts

Because agencies almost always pay, the lender's main concern is whether you will perform and bill correctly. Expect questions about:

• Contract type. Firm-fixed-price, time-and-materials and cost-reimbursement contracts carry different cost and billing risks.

• Termination rights. The government can generally end a contract for its convenience. Lenders look at how much exposure they would have if that happened.

• Past performance. A record of similar work, or key staff who have done it, reduces risk.

• Billing systems. Clean timekeeping and cost accounting lead to accepted invoices and faster payment.

• Option periods. Lenders usually count only the funded base period, not option years that may never be exercised.

Subcontractors Face Different Risks

A subcontractor is paid by the prime contractor, not by the agency, so the prime's credit and payment habits matter more than the agency's. The Assignment of Claims Act does not apply between a prime and its subcontractor. Federal prompt payment rules require primes on federal construction contracts to pass payments down promptly, but delays still happen.

Lenders funding subcontractors will review the subcontract terms, any pay-when-paid language and the prime's history. Factoring a subcontract receivable usually costs more than factoring a direct agency invoice because the risk is higher.

Getting Ready to Apply

Lenders can move faster when the basics are in order. Make sure your registration in the System for Award Management is active and your entity details match your bank records. Then gather:

• The signed contract or task order, with all modifications

• The contract's payment and assignment clauses

• A budget and cash flow forecast for the contract period

• Recent financial statements, tax returns and an accounts receivable aging report

• Details of any existing liens or lines of credit

Frequently Asked Questions

Can a new contractor get government contract financing?
Often yes. Because the payer is a government agency, factors and specialty lenders may fund newer businesses that would not qualify for a bank loan, as long as they can show the ability to perform.

Do state and local contracts follow the same rules?
No. Assignment and payment rules for state and local contracts come from state law and the contract itself, so lenders review them case by case.

Will the agency know I am using financing?
If payments are assigned under the Assignment of Claims Act, yes, because the agency must receive formal notice. Some lines of credit do not require an assignment.

Plan Your Contract Funding Early

The best time to arrange government contract financing is before award, when you can match the financing to the contract's payment terms and start-up costs. Review the contract clauses, build a realistic cash flow forecast and compare a few options so the money is ready when the work begins.

Government contract financing helps businesses cover the costs of performing federal, state or local contracts while they wait for the agency to pay. Government customers rarely default, but they follow strict invoicing and payment procedures, and a new contractor can spend months funding payroll, materials and overhead before the first payment arrives.

This page explains where the cash gap comes from, the financing agencies provide themselves, the private options available, the federal law that governs assigning contract payments to a lender and how to prepare before you apply.

Why Government Work Creates a Cash Gap

Winning the award is only the start. Before you can bill, you may need to hire staff, buy materials, secure bonds and insurance and complete the first deliverable. Invoices must be submitted in the agency's required format, and payment often waits until the work is inspected and accepted.

The Prompt Payment Act generally requires federal agencies to pay a proper invoice within 30 days of receipt, or by the due date set in the contract, and to pay interest when they pay late. That is a useful protection, but the 30 days only start once a correct invoice is in hand. Errors, missing documents or a slow acceptance step can push payment well beyond that. State and local governments set their own payment rules, which vary.

Financing the Government Provides Directly

Federal agencies can finance some contracts themselves. The Federal Acquisition Regulation lists the forms and an order of preference, with private financing first and advance payments last.

• Progress payments based on costs. On qualifying fixed-price contracts, the agency reimburses a share of costs as they are incurred. The regulation sets a customary rate of 80 percent of total costs, or 85 percent for small businesses, and some agencies use higher rates.

• Performance-based payments. Payments are tied to measurable events or milestones rather than costs incurred.

• Advance payments. Money paid before performance. These are the least preferred form and are approved only in limited circumstances.

Not every contract includes these terms, and short or commercial-item contracts often do not. Check the contract clauses, and raise financing needs with the contracting officer before award where possible.

Private Financing Options for Contractors

• Government receivables factoring. A factor buys or advances against approved invoices to an agency, so you are paid in days rather than waiting for the agency's payment cycle.

• Contract-based lines of credit. A revolving line sized to your contract backlog funds payroll and overhead between payments. Banks and non-bank lenders both offer them.

• SBA Contract CAPLine. This SBA 7(a) program finances the costs of one or more specific contracts, including allocable overhead. 7(a) loans are capped at $5 million and come through participating lenders.

• Purchase order financing. Useful on supply contracts where you buy finished goods from a manufacturer and resell them to an agency.

• Mobilization funding. Covers start-up costs on construction and some service contracts before the first progress payment.

The Assignment of Claims Act

Federal law limits who can collect money owed under a federal contract. The Assignment of Claims Act, carried out through the Federal Acquisition Regulation, lets a contractor assign contract payments to a lender only if certain conditions are met:

• The contract calls for payments totaling $1,000 or more.

• The assignee is a bank, trust company or other financing institution.

• The assignment covers all unpaid amounts and goes to a single party, although that party can act as agent for several lenders.

• The contract does not prohibit assignment.

• The lender sends written notice and a copy of the assignment to the contracting officer, the surety on any bond and the disbursing officer.

Once the assignment is acknowledged, the agency pays the lender directly. This is what gives many lenders the comfort to fund government work. Ask any prospective lender whether it files formal assignments and how long acknowledgment usually takes with your agency.