Contract Financing for Government Contractors: Cash Flow Solutions

Federal contracts create unique cash flow challenges that many businesses aren't prepared for.

The payment timing problem:

• You incur costs immediately (payroll, materials, overhead)
• Invoice monthly or at milestones
• Government pays within 30 days (Prompt Payment Act)
• Reality: 30-45+ days from invoice to payment
• Total float: 45-90+ days of working capital needed

Contract ramp-up costs:

• Hiring and training staff
• Equipment and facility setup
• Security infrastructure
• Initial inventory and supplies
• Travel and mobilization

Why cash flow matters:

• Can't make payroll = performance failure
• Cash crisis = subcontractor problems
• Late vendor payments = damaged relationships
• Running out of cash = business failure

Many successful small businesses fail not from lack of contracts, but from running out of cash while performing them.

Progress payments (FAR 32.5):

Government pays a percentage of costs incurred before delivery:

• Available on contracts over $3 million (generally)
• Large business: up to 80% of costs
• Small business: up to 85% of costs
• Must be approved in contract
• Requires adequate accounting system

Performance-based payments:

• Payments tied to achieving milestones
• Negotiated at contract award
• Can be better than progress payments if milestones are front-loaded

Advance payments:

• Rare — government pays before work performed
• Usually for specific circumstances (unusual startup costs)
• Requires high-level approval

Interim payments on cost-reimbursable:

• Bill costs as incurred
• More frequent payment than FFP
• Reduces cash flow burden

Request financing provisions:

If contract doesn't include financing provisions, you can request them — especially on large contracts where cash flow would otherwise be problematic.

How factoring works:

You sell your government invoices to a factoring company at a discount:

1. You invoice the government
2. Factor advances you 80-90% immediately
3. Government pays factor when invoice due
4. Factor pays you remaining balance minus fees

Typical factoring terms:

• Advance rate: 80-90% of invoice
• Fee: 1-5% of invoice value
• Additional fees for longer payment periods

Advantages:

• Fast access to cash (days, not weeks)
• Based on invoice value, not your credit
• No debt on your books
• Scales with contract growth

Disadvantages:

• Expensive compared to traditional financing
• Reduces profit margins
• Government notification (Assignment of Claims)
• May signal financial distress to customer

Government invoice factoring specialists:

Several companies specialize in factoring government contracts, understanding the unique requirements and payment processes.

Contract-secured line of credit:

• Loan secured by government contract
• Draw funds as needed for contract performance
• Lower cost than factoring
• Requires bank familiar with government contracting

Traditional line of credit:

• Based on overall business creditworthiness
• May require collateral beyond contracts
• More flexible use of funds
• Harder to qualify for newer businesses

Term loans:

• Fixed amount for specific purpose (equipment, expansion)
• Regular repayment schedule
• Not ideal for working capital fluctuations

Finding the right bank:

• Look for banks with government contractor experience
• Community banks may be more flexible
• SBA-approved lenders understand government work
• Ask other contractors for recommendations

What banks want to see:

• Signed contract or task order
• Track record of performance
• Adequate accounting systems
• Personal guarantees (for small businesses)

SBA 7(a) loans:

General purpose small business loans, guaranteed by SBA:

• Up to $5 million
• Working capital, equipment, real estate
• Longer terms than conventional loans
• Lower down payments

SBA Express loans:

• Up to $500,000
• Faster approval process
• Revolving lines of credit available

CAPLines:

SBA's contract financing program:

• Contract CAPLine — Finances individual contract costs
• Seasonal CAPLine — Seasonal working capital
• Builders CAPLine — Construction financing
• Working Capital CAPLine — General working capital

SBA 504 loans:

• Long-term fixed assets (real estate, equipment)
• Lower down payments
• Fixed interest rates
• Not for working capital

SBA Microloan program:

• Up to $50,000
• Smaller, newer businesses
• Through intermediary lenders

Cash flow forecasting:

Model your cash position over time:

• Project costs by month
• Estimate invoice timing
• Predict payment receipt dates
• Identify cash shortfall periods

Accelerate collections:

• Invoice promptly — every day delayed costs you
• Submit clean invoices that won't be rejected
• Follow up on late payments
• Use electronic invoicing when available

Manage disbursements:

• Negotiate payment terms with vendors
• Time major purchases with cash availability
• Use credit terms strategically
• Prioritize critical payments

Contract structure optimization:

• Request progress or milestone payments
• Front-load deliverables where possible
• Negotiate favorable CLIN structures
• Consider T&M for steady cash flow

Maintain reserves:

Target 2-3 months of operating expenses in cash reserve. Government contracting has inherent uncertainty — be prepared for delays.

What is Assignment of Claims?

Federal law (31 U.S.C. 3727) governs assigning rights to payment under government contracts.

How it works:

• Contractor assigns right to receive payment to a financing institution
• Government pays the assignee (bank or factor)
• Requires proper documentation filed with contracting officer

Requirements:

• Written assignment
• Financing institution must be bank or trust
• Notice to contracting officer and disbursing officer
• Contract must not prohibit assignment

Limitations:

• Only the right to payment can be assigned, not the contract itself
• Government's rights against contractor preserved
• Set-offs and deductions still apply

Common issues:

• Paperwork errors delay effectiveness
• Some contracts restrict assignment
• Must be done correctly or payments go to wrong party

Firm Fixed Price (FFP):

• Highest cash flow risk
• All costs incurred before delivery/payment
• Progress payments help but aren't automatic
• Factor invoices or use line of credit

Cost Plus:

• Bill costs as incurred — better cash flow
• Monthly (or more frequent) billing cycles
• Fee billed with costs
• Lower financing needs

Time & Materials:

• Bill hours worked regularly
• Materials may require advance purchase
• Moderate financing needs

IDIQ/Task Orders:

• Irregular task order timing creates uncertainty
• May need to ramp up quickly
• Maintain flexible financing capacity

Construction:

• High upfront material and equipment costs
• Progress payments common
• Retainage holds back portion until completion
• Bonding requirements add cost