Why do government contractors get squeezed on cash?
Government contractors get squeezed because the work starts the day the contract is awarded, but the first payment often arrives 30 to 90 days after the first invoice, and sometimes later. Payroll, subcontractors and materials do not wait for an agency’s acceptance process.
The federal Prompt Payment Act generally requires agencies to pay proper invoices within 30 days and to pay interest when they are late, but the clock starts only when an invoice is "proper" and the work is accepted. A missing CLIN, a wrong contract number or outdated banking details in your SAM.gov record can reset the clock. State and local agencies follow their own prompt payment rules, and many pay slower than federal agencies.
Subcontractors feel it twice. They wait for the prime, and the prime often waits for the agency, with pay-when-paid language pushing the delay down the chain.
How does the Assignment of Claims Act affect factoring?
On a federal prime contract, the funder usually needs a formal assignment under the Assignment of Claims Act (31 U.S.C. 3727 and 41 U.S.C. 6305, implemented in FAR Subpart 32.8) before the government will pay the funder directly. Without it, the agency pays you, and the funder relies on you to forward the money.
The Act is narrow and specific. In general terms, the assignment must go to a bank, trust company or other financing institution; the contract must not prohibit assignment; the assignment normally covers all amounts payable under the contract; and written notice plus a copy of the assignment instrument must be filed with the contracting officer, the disbursing office and any surety. The contracting officer acknowledges the assignment, and from then on payments are made to the assignee.
The process typically takes two to six weeks depending on the agency. Many funders will advance on the contract during that window under a standard UCC filing and a payment direction, then switch to direct payment once the acknowledgment comes back. Ask any funder exactly how they handle this period.
Subcontractors do not use the Assignment of Claims Act. Your customer is the prime contractor, a commercial account debtor, and your invoices are factored like any other B2B receivable.
Prime contractor or subcontractor: how does underwriting differ?
Primes are underwritten mainly on contract terms and invoicing hygiene, because the government will pay. Subcontractors are underwritten on the prime’s credit and the subcontract’s payment language, because the prime is the one paying.
| Factor | Federal prime | Subcontractor to a prime | State / local agency |
|---|---|---|---|
| Who pays | Federal agency via its paying office | Prime contractor | State, county, city, school district |
| Typical advance | 80%–90% | 75%–90% depending on prime credit | 75%–90% |
| Assignment mechanism | Assignment of Claims Act notice and acknowledgment | UCC filing plus notice to the prime | UCC filing plus agency payment direction; rules vary by state |
| Key risk | Invoice rejection, contract funding, stop-work orders | Pay-when-paid clauses, prime’s solvency | Appropriations timing, slow AP |
| Key documents | Contract, mods, SAM record, invoice submissions | Subcontract, prime’s POs, prime credit | Contract, purchase orders, agency vendor setup |
What documents do funders need from a government contractor?
Funders need proof that the contract exists, is funded and assignable, and that your invoices are being accepted. Assemble these before you apply and you can shave a week off underwriting.
- Contract or task order, all modifications, and the funded amount by CLIN
- Active SAM.gov registration, UEI and CAGE code (federal); confirm the remittance information on file
- Copies of recent invoices and acceptance records from the agency’s invoicing system
- Subcontract and prime’s purchase orders, if you are a sub
- AR aging by agency or prime, including any rejected or returned invoices
- Any existing liens, SBA loans or prior assignments on the contract
- Bonding information if the contract is bonded (the surety must receive assignment notice)
- Recent payroll tax filings, especially for service contracts with large labor content
Which government contractors qualify for factoring?
Most contractors with performing contracts and accepted invoices qualify, including 8(a), HUBZone, SDVOSB and WOSB set-aside firms with limited operating history. What disqualifies files is usually structural, not credit: contracts that prohibit assignment, a prior lender already holding the assignment, or invoices that have not yet been accepted.
Young firms that just won their first prime award are a common fit; see startup factoring. If you have an SBA loan with a blanket lien, the lender must agree to subordinate the receivables; our guide to factoring with an SBA loan covers how that intercreditor works.
- Performing federal, state or local contract, or a subcontract to a creditworthy prime
- Contract does not prohibit assignment (federal primes)
- Invoices submitted and accepted, not just work in progress
- No unresolved prior assignment or blanket lien that cannot be subordinated
- Monthly billings that support a facility of $50K or more
Can I factor before the contract starts paying?
Factoring funds invoices, not awards, so you generally need at least one billed and accepted invoice before money moves. What you can do is line up the facility, file the assignment paperwork and get approved before your first billing cycle, so the first advance arrives as soon as the first invoice is accepted.
If you need cash to buy materials before you can invoice, look at PO and inventory financing alongside factoring. For large awards, ask about mobilization advances available under the contract itself.
Illustrative scenario
SDVOSB facilities contractor wins a base operations task order
A service-disabled veteran-owned facilities contractor wins a federal task order worth about $2.4 million a year. Monthly payroll will be roughly $160,000, invoices go through the agency’s electronic invoicing system, and payment typically lands 30 to 45 days after acceptance.
- Facility sized at $500,000 against the task order and an existing commercial contract
- Assignment of Claims Act notices filed with the contracting officer and paying office; acknowledgment received in about four weeks
- Interim advances made on accepted invoices under a UCC filing and payment direction before the acknowledgment
- Advance of 85% on accepted invoices, fee in the low single digits per 30 days
- Existing SBA lender signs a subordination limited to the factored receivables
Outcome: The contractor meets payroll from the first month without drawing down the owner’s savings. Once the assignment is acknowledged, agency payments go directly to the funder and the reserve releases on a predictable schedule.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
What is the Assignment of Claims Act?
It is the federal law, at 31 U.S.C. 3727 and 41 U.S.C. 6305, that allows a contractor to assign payments under a federal contract to a financing institution. The assignee must give written notice and a copy of the assignment to the contracting officer, disbursing office and any surety. Once acknowledged, the government pays the assignee directly.
Do subcontractors need an Assignment of Claims?
No. A subcontractor’s customer is the prime contractor, not the government. Subcontractor invoices are factored like other commercial receivables, with the funder notifying the prime and underwriting the prime’s credit.
What advance rate do government contractors get?
Advance rates on government receivables typically run 80% to 90% of accepted invoices. Federal agency credit is strong, so the range depends more on contract terms, invoice history and concentration than on payer credit.
How long does the federal assignment process take?
Commonly two to six weeks, depending on how quickly the contracting officer and paying office acknowledge the notice. Many funders advance during that window using a UCC filing and a payment direction, then switch to direct payment.
Can I factor if I have an SBA loan?
Often yes. Your SBA lender typically holds a blanket lien, so the funder will need the lender to subordinate its interest in the factored receivables. Many SBA lenders agree because factoring improves the borrower’s ability to make loan payments.
Does factoring work for state and local government contracts?
Yes, though the mechanics vary. There is no single state-level equivalent of the federal Act, so funders rely on UCC filings, notice to the agency and the agency’s own vendor payment procedures. Some agencies require specific forms to change remittance.
Will a stop-work order affect my facility?
It can. Invoices for work already accepted remain collectible, but the funder will stop advancing on new billings under the affected contract and may increase reserves. Tell the funder immediately if you receive a stop-work or termination notice.