Winning a government contract is a milestone — and a cash-flow challenge. Agencies and prime contractors are among the most creditworthy customers a business can have, but they pay on their own schedule, and services contractors still have to make payroll every two weeks. Government contract factoring bridges that gap. This guide covers how it works, how federal receivables are assigned, and why the government's credit actually makes approval easier.
How government contract factoring works
You deliver the work and submit an approved invoice to the agency or prime. Rather than wait, you sell that receivable to a factor, which advances a large percentage — typically 80 to 90 percent — usually within a business day, then collects on the contract's normal terms. When the government pays, you receive the balance minus the factor's fee. The model is especially useful for services contracts, where payroll is the biggest and most time-sensitive cost.
Why the government's credit helps you
In factoring, approval rides on the payer's creditworthiness, not the client's. Because federal, state, and municipal agencies (and established primes) are among the strongest possible debtors, factoring is often available to newer small businesses — including set-aside, 8(a), SDVOSB, and small-business firms — that could not get a bank line. The slow payment is the problem factoring solves; the strong credit is what makes it work.
The Assignment of Claims Act
Federal receivables are assigned under the Assignment of Claims Act, following the procedures in the Federal Acquisition Regulation (FAR). In practice this means the factor is properly notified as the party to be paid, with the required notices filed with the contracting officer and disbursing office. Experienced government-contract factors handle this assignment and notification process as part of onboarding, so it does not fall on you.
State, local, and prime-subcontractor invoices
Factoring is not limited to federal work. State and municipal agency receivables, and invoices to established prime contractors, factor normally — what matters is an approved invoice and a creditworthy government or prime payer. Subcontractors billing a prime often find factoring particularly valuable, since primes may pay only after the government pays them.
Is it right for your firm?
Government contract factoring fits contractors whose main constraint is making payroll and covering costs while agencies process invoices — most often services, staffing, IT, base-support, and product-supply firms. If you need a one-time lump sum instead, revenue-based funding may fit. Y Millennial Funding offers government contract factoring and revenue-based funding for contractors doing $50,000 or more in monthly revenue. Factoring is the purchase of receivables, not a loan. Not all applicants qualify.