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Government contract factoring

Learn when this B2G cash flow solution can help — and when to avoid it.

Government contracts are competitive — taking over a project for FEMA or the DOT often pays better than the projects a small business might find elsewhere. But you can wait up to three months after completing a job to finally get paid.

Government contract factoring is a solution that can help you meet payroll and keep your business’s lights on while you wait. But it can be more expensive than traditional business loans.

What is government contract factoring?

Government contract factoring is a type of accounts receivable financing that allows businesses to get an advance on unpaid invoices from the federal or local government. It’s also called government contract receivables factoring.

Government contract factoring can be particularly helpful to small businesses that rely on invoices to stay afloat financially and can’t qualify for a term loan or line of credit. It can also help you continue to bid on contracts while you wait to get those funds.

How does government contract factoring work?

With government contract factoring, a business-to-government (B2G) business sells its unpaid invoices to a factoring company at a discount. The factoring company first advances you 80% to 90% of the invoices’ value. After the government satisfies its invoices, the factoring company pays the remaining 10% to 15% minus a fee.

Some factoring companies are willing to factor just one month of invoices — called spot factoring. Others require businesses to sign contracts for months or even years of factoring at a time. While spot factoring doesn’t require as much commitment, it tends to be more expensive.

Compare business loan providers that offer factoring options

Name Product Filter Values Loan amount APR Requirements
Biz2Credit business loans
Finder Rating: 4.7 / 5: ★★★★★
Biz2Credit business loans
$25,000 – $6,000,000
Starting at 5.99%
6+ months in business; $100,000+ monthly revenue; 500+ credit score
Get only the capital you need through secure, prescreened lenders with this highly rated company offering SBA, expansion, working capital and other loans.
Lendio business loans
Finder Rating: 4.75 / 5: ★★★★★
Lendio business loans
$500 – $5,000,000
Starting at 6%
Operate business in US or Canada, have a business bank account, 560+ personal credit score
Submit one simple application to potentially get offers from a network of over 300 legit business lenders.
ROK Financial business loans
Finder Rating: 4.7 / 5: ★★★★★
ROK Financial business loans
$10,000 – $5,000,000
Starting at 6%
Eligibility criteria 3+ months in business, $15,000+ in monthly gross sales or $180,000+ in annual sales
A connection service for all types of businesses — even startups.
OnDeck short-term loans
Finder Rating: 4.6 / 5: ★★★★★
OnDeck short-term loans
$5,000 – $250,000
As low as 35%
600+ personal credit score, 1 year in business, $100,000+ annual revenue, active business checking account
A leading online business lender offering flexible financing at competitive fixed rates.
Fundbox lines of credit
Finder Rating: 4.2 / 5: ★★★★★
Fundbox lines of credit
$1,000 – $150,000
Not stated
6 + months in business, $100,000+ in annual revenue, 600+ credit score
Get flat rate, short-term financing based on the financial health of your business, not your credit score.

Compare up to 4 providers

What types of businesses should consider government contract factoring?

Any business that regularly relies on government contracts can benefit from government contract factoring:

  • IT specialists
  • Staffing services
  • Security agencies
  • Consultants
  • Manufacturers
  • Product distributors
  • Medical services
  • Construction
  • Logistics and transportation

What does my business need to qualify?

A main draw of government contract factoring is that it’s often easier to qualify for than more traditional types of financing.

Your personal credit score and business experience usually don’t count. Instead, your business must meet requirements that include:

  • Invoices from a government contract.
  • Acceptance by a government agency for a completed project.
  • Invoices that aren’t collateral for another loan or part of a lien.

Some factoring companies impose minimums on the value of your projects. Typically, invoices must be due in 30 to 90 days to qualify.

How much does it cost?

The main cost of government contracting factoring is the factoring fee. This fee is usually a percentage of the invoices’ total value.

Most companies charge a factoring fee in one of two ways:

  • Tiered fee.Your factoring company charges a percentage of 1% to 2% a month. It may charge a slightly higher rate — around 2% to 3% — for the first 30 days and a lower rate every 10 days after.
  • Flat fee.Your factoring company charges a flat rate of 3% to 6% of the total value of your invoices. This fee stays the same, no matter how long the government takes to satisfy its invoices.

What are the payment terms?

Most factoring companies require your invoices to be due in 30 to 90 days. If your factoring company charges a flat fee, your invoices’ due dates don’t affect the cost. But with tiered fees, the sooner your invoices are due, the more you stand to save.

Say your business is owed $100,000 in invoices for government projects due in 90 days. Choosing between a flat 5% fee or a tiered fee of 3% for the first 30 days and 1.5% for every 10 days after, here’s what you’d face:

  • Total cost with the flat fee— $5,000
  • Total cost with the tiered fee— $12,000

If the same invoices were due in 30 days instead of 90 days, here’s how the two types of fees would compare:

  • Total cost with flat fee— $5,000
  • Total cost with tiered fee— $3,000

In the end, a flat fee might help your business save money if its invoices are going to take longer to pay off. But a tiered fee can help you save if they’re due in 30 days.

What happens if the government doesn’t pay?

The government rarely breaches its contracts. But let’s say your contracts remain unpaid.

Some factoring companies offerrecourse factoring,which leaves your business responsible for covering the cost of unpaid invoices. Others offernonrecourse factoring,where the factoring company agrees to absorb the cost. Recourse factoring is typically less expensive than nonrecourse factoring, but it comes with more risk.

Thankfully, B2G businesses are protected from breach of contract by the Contract Disputes Act of 1978. If the agency you’re working with doesn’t fulfill its contract, contact the contracting officer responsible for overseeing your contract. The contracting officer will consider both sides of the case and come to a decision.

If you’re not happy with the decision, you can appeal it by taking your case to the board of appeals or escalate your case by filing a civil lawsuit with the US Court of Federal Claims.

What are the benefits of government contract factoring?

  • Easy to qualify.You won’t find revenue, history or credit score requirements when it comes to government contract factoring.
  • No repayments.Because it’s technically not a loan, you don’t need to worry about repaying your factoring company.
  • Bid more frequently.Your business needs funds to cover the upfront costs of a new project. Factoring lets your company bid for more contracts than you’d be able to take on if you waited for invoices to fully settle between each project.
  • Covers overhead.Government contract factoring can you keep your business’s doors open while waiting for a new contract to come through.

What’s the downside?

  • Expensive.Factoring is generally more expensive than other types of financing.
  • Limited uses.Because factoring is an advance on funds your business has already earned, it’s not ideal for growing your business.
  • Lengthy application.You can’t just apply for factoring online. Instead, you’ll need to submit documents showing how much your invoices are worth and more. This isn’ta “no paperwork” business loan.

How to apply for government contract factoring in 6 steps

Applying for government contract financing works a lot like any other type of factoring.

  1. Invoice the government agency.You must show an invoice to be eligible for government contract factoring. Send a bill and get a timeline of how long it’s going to take for payment.
  2. Compare factoring companies.It’s hard to find details online, so you might need to call or email factoring companies to ask about fees, additional costs and whether you’ll sign up for recourse or nonrecourse factoring. You may need to describe your business to learn basic requirements.
  3. Complete the application.Most factoring companies allow you to start an application online. But you’ll likely need to speak with a representative to complete it.
  4. Submit your documents.After you’re approved, submit copies of your invoices and contracts.
  5. Receive your advance.You might see an advance of 80% to 90% within 24 hours, though some companies take longer.
  6. Wait for the government to satisfy your invoice.After you sell your invoice to a factoring company, it’s in charge of handling the payment. After the government pays the invoice, your business receives the remaining 10% to 20% less the factor fee.

Alternatives to government contract factoring

You may be looking for a simpler financing alternative that doesn’t involve your accounts receivable, in which case your options include:

  • A line of credit.Similar to a credit card, a line of credit gives your business access to a credit limit that it can draw from as needed. Your business either pays off each withdrawal like a short-term loan or through minimum monthly payments.
  • Term loan.If you’re not worried about cash flow but instead need funds to cover the upfront costs of a new contract or another one-time expense, a term loan can be a cheaper alternative than factoring. You’ll likely need good credit and at least two years in business for the most competitive rates.
  • Equipment financing.If you need funds to replace or buy new equipment, an equipment loan might be a less expensive alternative. Because these loans are secured by the equipment you buy, they tend to have lenient eligibility than term loans and lines of credit.
  • Personal loan for business.Applying for a loan in your own name could be an option if your business is too young or lacks the cash flow to qualify for a business term loan. Personal loans often come with even lower rates than business loans, though in smaller amounts.

Bottom line

Government contracting financing could be a cash flow solution for businesses that need working capital or funds to take on that next contract. But its high cost might be reason enough to look elsewhere.

Learn more about your business financing options in ourbusiness loans guide.

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