Government Contract Financing: Complete Guide to Funding Your Contract Work
Learn how to finance government contract work including progress payments, invoice financing, contract financing programs, and strategies for managing cash flow as a government contractor.
Quick Overview: Government Contract Financing
Government contracts provide stable revenue but often create cash flow challenges—you incur costs before receiving payment. Understanding financing options is essential for sustainable growth. From government programs to commercial lending, multiple solutions exist for contractors at every stage.
Cash Flow Challenges in Government Contracting
Government contracts create unique cash flow situations that differ from commercial work. Understanding these challenges helps you plan financing needs.
Common Cash Flow Issues
- !Payment Delays
30-60 days standard; can extend longer
- !Mobilization Costs
Significant upfront investment before work begins
- !Retainage
5-10% withheld until project completion
- !Payroll Requirements
Must pay employees regardless of payment status
Why Government Is Different
- →Can't get advance deposits like commercial work
- →Invoice processing follows strict procedures
- →Payment requires proper documentation
- →Fiscal year funding constraints
- →Contract modifications can delay payment
The Good News
Government payment—while sometimes slow—is extremely reliable. The U.S. government always pays its bills, making government receivables excellent collateral for financing.
Government Financing Programs
The government offers several programs to help contractors manage cash flow, particularly for larger contracts.
Progress Payments
Progress payments allow contractors to receive partial payment based on costs incurred, before delivering final products. Available on contracts over $3 million.
Small Business Rate
Up to 85% of incurred costs
Large Business Rate
Up to 80% of incurred costs
Performance-Based Payments
Payments tied to achieving specific milestones rather than costs incurred. Requires well-defined deliverables and acceptance criteria.
- ✓Can be up to 90% of milestone value
- ✓Paid upon government acceptance
- ✓Less administrative burden than progress payments
Prompt Payment Act
The government must pay proper invoices within 30 days (construction: 14 days for progress payments). Interest accrues on late payments.
Commercial Financing Options
Beyond government programs, commercial lenders offer products specifically designed for government contractors.
Lines of Credit
Revolving credit lines provide flexible working capital.
- • Draw as needed, pay down as cash comes in
- • Interest only on amounts used
- • May require personal guarantee
- • Often secured by receivables
Term Loans
Fixed amount borrowed and repaid over set period.
- • Predictable payment schedule
- • Good for equipment or mobilization
- • May require collateral
- • Typically 3-10 year terms
Asset-Based Lending
Loans secured by company assets—receivables, equipment, inventory.
- • Borrowing capacity grows with assets
- • More flexible than traditional loans
- • Government receivables are strong collateral
- • Regular reporting requirements
Contract Financing
Specialized lending against specific contract value.
- • Based on contract, not just credit
- • Available for newer contractors
- • Lender evaluates contract risk
- • Typically higher rates
SBA Loan Programs for Contractors
The SBA offers several programs particularly useful for government contractors.
SBA 7(a) Loans
The most common SBA loan program, good for working capital, equipment, and real estate.
SBA Express Loans
Faster approval for smaller loan amounts with streamlined process.
Maximum Amount
$500,000
Response Time
36 hours
CAPLines
SBA's working capital line of credit program—specifically designed for contractors who need to finance contract performance.
- ✓Contract Line: Finance individual contracts
- ✓Seasonal Line: For seasonal cash needs
- ✓Builders Line: Construction projects
- ✓Working Capital: General short-term needs
Invoice & Contract Financing
Invoice financing lets you access cash from outstanding invoices before the government pays. Popular option for contractors needing quick working capital.
Invoice Factoring
Sell your invoices to a factor at a discount for immediate cash.
- • Receive 80-90% of invoice value immediately
- • Factor collects from government
- • Remaining balance (less fees) paid when collected
- • Fees typically 1-5% of invoice value
Invoice Financing
Use invoices as collateral for a line of credit—you retain ownership.
- • Borrow against invoice value
- • You collect from government
- • Pay back when collected
- • Typically lower cost than factoring
Assignment of Claims
To factor or finance government receivables, you typically need to "assign" the government's payment to the lender. The government must be notified and acknowledge the assignment via the Assignment of Claims Act process.
Managing Cash Flow Effectively
Beyond financing, good cash flow management practices reduce your financing needs.
Best Practices
Invoice Promptly and Accurately
The payment clock starts when a proper invoice is received. Invoice immediately when entitled and ensure all required documentation is included.
Negotiate Payment Terms
Request progress payments or performance-based payments in your proposals. Negotiate favorable terms with subcontractors and suppliers.
Monitor Receivables
Track invoice status closely. Follow up on late payments immediately. Know who to contact at each agency for payment issues.
Build Cash Reserves
Maintain working capital reserves to bridge payment gaps without expensive financing. Aim for 2-3 months of operating expenses.
Manage Growth Carefully
Rapid growth strains cash flow. Don't take on more contracts than you can finance. Sometimes saying no protects your business.
Common Financing Mistakes
1. Not Planning for Cash Flow Needs
Waiting until you're in crisis to seek financing results in worse terms and limited options. Plan financing before you need it.
2. Over-Reliance on Expensive Financing
High-cost factoring or merchant cash advances eat into margins. Use them sparingly and work toward lower-cost options.
3. Not Requesting Contract Financing Provisions
Progress payments and performance-based payments must be negotiated into contracts. If you don't ask, you don't get them.
4. Growing Faster Than Financing Allows
Taking contracts you can't finance is a recipe for failure. Know your financing capacity and grow within it.
5. Poor Invoice Management
Improper invoices delay payment. Ensure invoices meet all requirements and include proper documentation.
Frequently Asked Questions
How quickly can I get contract financing?
Invoice factoring can fund in 24-48 hours. Traditional bank loans take 2-4 weeks. SBA loans may take 30-60 days. Plan ahead when possible.
Do I need collateral for government contract financing?
The government contract itself (specifically the receivables) serves as primary collateral for most contract financing. Personal guarantees and additional collateral may also be required.
What's the typical cost of invoice factoring?
Government invoice factoring typically costs 1-5% of invoice value, depending on volume, credit quality, and payment terms. Government receivables generally get better rates due to payment reliability.
Can new contractors get financing?
Yes. While traditional bank financing is difficult for new businesses, contract-based financing evaluates the contract risk rather than just your business history. A strong contract can unlock financing.
Should I request progress payments on every contract?
Progress payments are generally only available on larger contracts ($3M+ for customary progress payments). For smaller contracts, focus on prompt invoicing and commercial financing options.
Find Contracts Worth Financing
The best contracts to finance are the ones you can win and perform profitably. BidFinds helps you find opportunities matched to your capabilities.
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