Working Capital for Government Contractors 2025: Cash Flow & Financing Guide

Quick Answer: Why is Working Capital Critical?

Government contractors face significant cash flow gaps because expenses accrue before payment. Even with prompt payment requirements, you may wait 30-60 days after invoicing. For cost-type contracts, retainage and indirect rate holds further delay full payment. Inadequate working capital causes more contractor failures than poor performance.

30-60

Days to Payment

15%

Typical Retainage

Upfront

Labor & Materials

Critical

Cash Planning

The Cash Flow Challenge

Government contractors pay expenses weeks or months before receiving payment. This creates a cash flow gap that must be financed.

Typical Cash Flow Timeline

Week 1-4: Perform work, pay employees-$

Week 4: Submit invoicePending

Week 5-8: Government reviews invoiceWaiting

Week 8-10: Payment received+$

Result: 6-10 weeks of expenses funded before first payment received.

Government Payment Types

Firm Fixed Price Payments

→Milestone payments at defined completion points
→Delivery payments upon acceptance
→Progress payments (if authorized)

Cost-Type Payments

→Monthly reimbursement of allowable costs
→Provisional indirect rates (adjusted later)
→Fee paid incrementally or at completion

Time and Materials

→Hourly rates include profit
→Materials at cost (possibly with handling fee)
→Monthly invoicing typical

Financing Options

Common Financing Sources

Invoice Factoring

Sell government invoices to a factor for immediate cash (typically 80-90%). Remainder paid when government pays, minus fees. Fast but expensive.

Lines of Credit

Revolving credit secured by contracts or receivables. More flexible than factoring, better rates, but harder to obtain.

SBA Loans

SBA 7(a) and CDC/504 loans for small businesses. Lower rates but longer approval process. Good for established contractors.

Contract Financing

Lenders advance funds against specific contracts. Terms tied to contract performance and payment schedule.

Financing Comparison

Option	Speed	Cost
Invoice Factoring	Days	High (2-5%)
Line of Credit	Weeks	Moderate
SBA Loan	Months	Low
Contract Financing	Weeks	Moderate

Managing Cash Flow

Cash Flow Best Practices

✓Invoice promptly—every day of delay costs money

✓Submit clean invoices to avoid rejection delays

✓Track payment status and follow up on late payments

✓Negotiate favorable terms with suppliers

✓Build cash reserves during good periods

Working Capital Planning

Calculate Your Needs

Estimate working capital requirements before bidding:

1.Project monthly expenses (labor, materials, overhead)
2.Estimate payment timing from contract terms
3.Calculate gap between expenses and receipts
4.Add contingency for delays (20-30%)

Financing Growth

Growth Warning

Rapid growth is a common cause of contractor failure. Each new contract increases working capital needs. Growing from $1M to $5M in revenue may require $500K+ in additional working capital. Plan financing before pursuing growth.

Frequently Asked Questions

How much working capital do I need?

A general rule is 2-3 months of operating expenses plus any startup costs for new contracts. More for construction, less for professional services.

What if the government pays late?

The Prompt Payment Act requires interest on late payments. You can file a claim for interest. However, interest does not solve your cash flow problem—financing does.

Can I get advances on government contracts?

Advance payments are rare and limited. Progress payments are more common on large contracts but require government approval and are typically based on costs incurred.

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