Factoring for Government Contractors

A creditworthy customer with its own rules

For a small contractor, the federal government is in some ways the ideal customer: it will not go out of business, and it is bound by statute to pay on time or owe interest. That reliability is why many factors are willing to fund government receivables. The complication is legal. Federal law restricts assigning claims against the United States, and an assignment that does not follow the statute can leave the factor unable to collect from the government at all.

The relevant law is the Assignment of Claims Act, codified at 31 U.S.C. 3727, implemented in Subpart 32.8 of the Federal Acquisition Regulation. The general rule in the statute is restrictive: an assignment can be made only after a claim is allowed, the amount decided and a payment warrant issued. The financing-institution exception is what makes contract factoring possible.

Who factors government contract invoices

Government receivables are creditworthy but slow and procedurally demanding, so the factors that take them tend to be generalists with experience of the Assignment of Claims Act rather than specialists. Eight profiled factors name government contractors. 1st Commercial Credit lists government receivables as a product line and publishes 0.69% to 4% with a $10,000 monthly minimum. Porter Capital advertises rates from 0.4% and lines up to $25 million. Bay View Funding, owned by Citizens Business Bank, publishes rates from 0.5% and advances of 70% to 90%. FundThrough funds online at 1.9% to 2.9% per 30 days with no construction or real estate invoices. Goodman Capital Finance, Liquid Capital and Factoring Express list government vendors, and Express Trade Capital offers government-contract financing among its trade-finance products. The table below compares what each publishes; confirm with any of them how they handle the assignment filing and agency setoff before you sign.

The Assignment of Claims Act conditions

Under FAR 32.802, a contractor may assign money due or to become due under a contract only if all of the following are met:

• the contract specifies payments aggregating $1,000 or more;
• the assignee is a bank, trust company or other financing institution, including any federal lending agency;
• the contract does not prohibit assignment;
• unless the contract expressly permits otherwise, the assignment covers all unpaid amounts under the contract, is made to only one party (which may act as agent or trustee for several lenders), and is not subject to further assignment; and
• the assignee sends written notice of the assignment, with a true copy of the assignment instrument, to the contracting officer or agency head, to the surety on any bond, and to the disbursing officer named in the contract.

Two consequences follow for anyone factoring a federal contract. First, the assignment is usually of the whole contract's payments, not individual invoices. You cannot factor one invoice under a contract to one company and the next to another. Second, the agency must be formally notified. Government factoring is never confidential.

FAR 32.803 adds that agencies may prohibit assignment in a contract if it is in the government's interest, and that under a requirements or indefinite-quantity contract where multiple government activities order and pay, amounts due on individual orders of $1,000 or more may be assigned.

The filing process step by step

FAR 32.805 sets out the procedure. In practice it runs like this:

1. The contractor and the factor sign an instrument of assignment covering the contract.
2. The factor files a notice of assignment, in the original and three copies, plus one true copy of the instrument, with each addressee listed in FAR 32.802: the contracting officer, any surety, and the disbursing officer.
3. Before acknowledging, the contracting officer checks that the contract was properly executed, that it permits assignment, that the assignment covers only money due under the contract, and that the assignee is separately registered in SAM unless an exception applies.
4. Each addressee returns signed copies acknowledging the date and hour of receipt.
5. The payment office updates where payments go, and the agency pays the factor.

That process typically takes longer than a commercial notice of assignment. Contracting officers handle many priorities, and an acknowledgment can take weeks. Many factors will advance against the first invoices before acknowledgment arrives, but at a lower advance or with more recourse, because until the paperwork is complete the government may still pay the contractor.

Ending the arrangement also requires paperwork. FAR 32.805 calls for a release of assignment when the contractor's obligations to the factor are satisfied, or when a new financing institution takes over, with notices filed with the same addressees. Plan for this if you might later move to a bank line; the guide to switching factoring companies covers the commercial side.

How fast agencies pay

The Prompt Payment Act sets the baseline timing. Under FAR 32.904, payment is generally due on the later of 30 days after the designated billing office receives a proper invoice or 30 days after government acceptance of the supplies or services. For interest-penalty purposes, acceptance is deemed to occur seven days after delivery or performance unless there is a dispute or the contract sets a longer period. Construction progress payments are due 14 days after receipt of a proper payment request.

The phrase that matters is proper invoice. Invoices with missing contract line items, incorrect remit-to details, or that are submitted outside the agency's required system are rejected and the clock restarts. Factors that specialize in government work know the invoicing platforms and can catch errors before submission, which is part of the value they provide.

Prime contractors are not the only beneficiaries. Subcontractors bill the prime, not the government, so their receivables are commercial invoices and can be factored without the Assignment of Claims Act process, though the subcontract's terms and the prime's credit still matter.

Setoff: the main government-specific risk

Even after a valid assignment, the government may in some cases reduce payments to collect debts the contractor owes it. FAR 32.803 explains that without a no-setoff commitment, the government may offset against payments to the assignee liabilities of the contractor that arose independently of the assigned contract, if they existed when the notice of assignment was received. A no-setoff commitment, which protects the assignee, is available only in limited circumstances, such as designated agencies' contracts where the agency head has made and published a determination of need.

For a factor, this means a contractor's tax debts, overpayment claims from other contracts, or other federal debts can reduce what the factor collects. Expect factors to check tax compliance and federal debt status before funding, and to hold back more reserve if anything is outstanding.

What it costs

We did not find a published, government-specific factoring rate schedule from a source we could verify, so we describe pricing qualitatively. Across industries, a FreightWaves explainer on factoring costs puts typical base rates at 1% to 5% of each invoice, with lower rates for large, low-risk portfolios. Government receivables carry very low credit risk, which pushes pricing down, but the assignment paperwork, the setoff risk and the reliance on proper invoicing add administrative cost. The net effect varies by contract size, agency and how clean the contractor's invoicing is. Many government contractors with a predictable invoice flow find factoring pricing competitive; small or short contracts tend to cost more per dollar because the setup work is fixed.

Ask any factor for the full cost of a typical invoice, including any setup or filing fee for the assignment, and test it in the factoring calculator.

What factors check before funding

• The contract itself. Whether it permits assignment, its total value, the period of performance and option years.
• Your registration and status. Active SAM registration, no exclusions, and current federal taxes.
• Past performance. Contractors with a history of rejected invoices, disputes or cure notices are riskier.
• Contract type. Fixed-price deliverables are simpler to finance than cost-reimbursement contracts, where billing depends on allowable-cost determinations and later audits.
• Other liens. Existing lenders with blanket filings need to release or subordinate.

Pitfalls to watch

Assigning the whole contract

Because the assignment generally covers all payments under the contract, you cannot easily mix funding sources on a single contract. If you later want a bank to finance part of it, the factor must release the assignment first.

Notice delays

Until the contracting officer and disbursing office acknowledge the assignment, payments may continue to come to you. You must forward them to the factor promptly. Using factored funds for operations is a breach of the agreement.

Minimums and contract length

A contract that ends or is not renewed can leave you with a factoring agreement that requires minimum volume. Align the factoring term with your period of performance and ask about termination fees. The contract reading guide lists the clauses to check.

State and local government

State and local contracts are governed by their own laws and procurement rules, not the federal Assignment of Claims Act. Some prohibit assignment, others have their own consent processes. Construction work on public projects raises separate issues; see construction factoring.

Alternatives for government contractors

• A bank line of credit secured by government receivables, once you have a performance record.
• SBA working-capital loans, including contract-based lines through SBA's CAPLines program, available through participating lenders.
• Progress payments or performance-based payments from the agency, where the contract allows, which can reduce or replace the need for outside financing.
• Better invoicing. If late payment is caused by rejected invoices, fixing the process is cheaper than financing the delay.

Frequently asked questions

Can I factor individual government invoices instead of the whole contract?

Generally no. Under the Assignment of Claims Act, unless the contract expressly permits otherwise, an assignment must cover all unpaid amounts under the contract and go to a single party. An exception allows assignment of individual orders of $1,000 or more under certain requirements or indefinite-quantity contracts where multiple government activities order and pay. Read your contract or ask the contracting officer.

Does the contracting officer have to approve the assignment?

The contracting officer reviews and acknowledges the notice rather than granting permission in a general sense. They check that the contract allows assignment, that it covers only money due under the contract, and that the assignee is properly registered. If the contract prohibits assignment, or the paperwork is incomplete, the assignment will not be acknowledged and the government may continue paying you.

What happens if I owe the government money?

Unless the contract includes a no-setoff commitment, the government can offset certain independent debts you owed when the notice of assignment was received against payments that would otherwise go to the factor. That reduces what the factor collects and, under a recourse agreement, shifts the loss back to you. Factors check federal debt and tax status before funding for this reason.

Can a subcontractor on a federal job factor its invoices?

Yes, and more easily than a prime. A subcontractor bills the prime contractor, not the government, so its receivables are ordinary commercial accounts. The factor underwrites the prime's credit and payment history. Federal flow-down clauses in the subcontract can still affect timing and should be reviewed, especially on construction work.