Government Contractor Factoring — Invoice Financing for Federal Contractors

Rates and eligibility verified May 2026 across multiple lenders. We may earn a referral fee if you apply through our links — this does not affect our analysis or rankings. All rates are for comparison purposes — your offer may differ based on contract type, volume, and agency.

Key Takeaways

Government contractor factoring advances 85–95% of federal invoice value at fees of 1–3% per 30-day period — the lowest rates of any industry because federal agencies carry virtually zero insolvency risk
The Assignment of Claims Act (the federal law permitting assignment of government contract receivables to lenders) requires contracting officer notification — only use factors with documented federal contracting experience
Start-up contractors who have won a federal contract can qualify immediately — approval is based on the agency's creditworthiness, not the contractor's history
Subcontract factoring requires prime contractor acknowledgment, and some primes are slow to cooperate — plan for potential setup delays on first invoices

Summary

Government contractor factoring advances 85–95% of federal invoice value at fees of 1–3% per 30-day period — the lowest rates of any industry because federal agencies carry virtually zero insolvency risk.
FundingCompass research, May 2026

Government contractor receivables financing converts outstanding federal invoices into immediate cash — bridging the gap between when work is delivered and when the government pays (typically 30–45 days under the Prompt Payment Act, though delays are common). Unlike commercial factoring, government contractor factoring must comply with the Federal Acquisition Regulation (FAR) — specifically the Assignment of Claims Act, which governs how receivables from federal contracts can be assigned to a third party. Advance rates reach 90–95% of invoice value, with factoring fees of 1–3% per 30 days. This is a mature, well-regulated market with numerous experienced lenders.

Pros for Government Contractors

Federal agencies are the most creditworthy payers available — virtually zero insolvency risk means non-recourse factoring is standard, and fees (1–3% per 30 days) are lower than commercial industries
Payment timelines are regulated under the Prompt Payment Act — 30-day payment deadlines with mandatory interest on late payments make cash flow more predictable than commercial factoring
Startup contractors who have won a federal contract can qualify immediately — approval is based on the agency's creditworthiness, not the contractor's history
FAR-compliant factors handle Assignment of Claims paperwork, reducing the administrative burden on the contractor's team

Cons and Watch-outs

The contracting officer must be formally notified of the assignment — some agencies have slower internal processes for updating payment routing, delaying first-invoice funding by days or weeks
Not all factoring companies understand federal contracting — using a factor unfamiliar with Assignment of Claims Act procedures risks legal non-compliance and payment delays
Subcontract factoring requires prime contractor acknowledgment, adding a step that not all primes will cooperate with quickly
Milestone-based fixed-price contracts may not be invoice-based, making them ineligible for standard factoring — confirm contract type eligibility before applying

Who Uses Government Contractor Factoring

Government contractor factoring is used by:

Federal IT and software contractors
Defense contractors (subcontractors and prime contractors)
Professional services firms with GSA schedules
Staffing agencies serving federal agencies
Construction and facility maintenance contractors
Janitorial and facilities services contractors
Engineering and architecture firms
Small businesses and 8(a) firms with federal contracts
Minority-owned businesses (MBE/WOSB/SDVOSB) with set-aside contracts

Government contracting creates predictable receivables — agencies are legally required to pay (unlike commercial customers who may dispute) — but payment delays create cash flow gaps that factoring directly addresses.

The Government Contracting Cash Flow Problem

Federal contracts create a specific cash flow challenge:

A small IT contractor wins a $2M annual contract with the Department of Defense
The contractor must hire staff, purchase equipment, and deliver services starting Month 1
Payroll and overhead are due every two weeks
The federal agency typically pays invoices 30–45 days after submission
Result: The contractor is paying employees before receiving payment from the government

For small businesses, this gap — paying out before receiving payment — creates a working capital deficit that grows as the contract scales. Factoring resolves this by advancing the majority of each invoice immediately after submission.

Legal Framework: FAR and the Assignment of Claims Act

Key regulatory requirements for government contractor factoring:

Assignment of Claims Act (31 U.S.C. § 3727): Federal law governs how government contract receivables can be assigned to a factoring company. Key requirements:

Assignment must be in writing
Contracting officer must be notified of the assignment
Assignment must be to a single financial institution (no splitting)
The factor takes the government’s obligation to pay — not just a security interest

FAR 32.8: The Federal Acquisition Regulation implements the Assignment of Claims Act and specifies the form and procedures for assignment. Lenders experienced in government contractor factoring know this process; general commercial factors may not.

Prompt Payment Act: Federal agencies are required to pay invoices within 30 days of receipt and acceptance. Late payments accrue interest. In practice, many agencies take longer — net 45–60 days is common for some contract types.

A receivables financing company must be familiar with government assignment-of-claims procedures. Always confirm that a prospective factor has experience with federal contracts before signing an agreement.

At a Glance: Government Contractor Factoring Terms

	Government Contract Factoring
Advance rate	85–95% of invoice value
Factoring fee	1–3% per 30 days
Recourse vs. non-recourse	Typically non-recourse (government agencies rarely become insolvent)
Payment timeline	30–45 days (Prompt Payment Act)
Contract types	Prime contracts, subcontracts (varies by lender)
Agency types	Most federal agencies; state/local varies by lender
Assignment requirement	Yes — contracting officer notification required

Rates verified May 2026. Your actual rate depends on contract volume, invoice size, and agency type.

Rates and Fees

Government contractor factoring is generally less expensive than commercial factoring because:

Federal agencies are extremely creditworthy — virtually zero insolvency risk
Payment timelines are regulated and predictable under the Prompt Payment Act
The legal framework is clear and enforceable

Typical Rate Range by Contract Volume

High-volume contracts ($500K+/year): 1.0–1.75% per 30 days
Mid-volume contracts ($100K–$500K/year): 1.5–2.5% per 30 days
Smaller contracts (under $100K/year): 2–3% per 30 days

Cost Example

Monthly invoicing	$100,000
Advance rate (90%)	$90,000 received immediately
Factoring fee (2%/30 days)	$100,000 × 2% × (35/30) = $2,333
Agency pays in 35 days
Reserve released	$100,000 − $90,000 − $2,333 = $7,667

Assignment of Claims Act (31 U.S.C. § 3727): The federal statute governing how government contract receivables can be assigned to a factoring company. Requires written assignment, contracting officer notification, and assignment to a single financial institution. Factors must be familiar with this law to legally factor federal invoices.
FAR 32.8 (Federal Acquisition Regulation): The regulatory implementation of the Assignment of Claims Act, specifying required forms and procedures for assigning federal contract receivables. A factor experienced in government contracting handles FAR 32.8 compliance as part of their standard process.
Prompt Payment Act (31 U.S.C. § 3901): Federal law requiring agencies to pay invoices within 30 days of receipt and acceptance, with mandatory interest accruing on late payments. This predictable timeline reduces factor risk on government contracts — a primary reason fees are lower than commercial factoring.
Notice of Assignment (NOA): The formal written notice sent to the Contracting Officer and Designated Billing Office directing the agency to pay the factor instead of the contractor. Required under FAR 32.805. The factor typically prepares this document and guides the contractor through submission.
IDIQ (Indefinite Delivery/Indefinite Quantity): A federal contract type that sets ceiling quantities and a period of performance without specifying exact quantities upfront. Work is ordered through individual task orders. IDIQ task order invoices are generally eligible for factoring — confirm individual task order requirements with your factor.

Example

Monthly invoicing (civilian agency)	$100,000
Advance rate (90%)	$90,000 upfront
Factoring fee (2%/30 days)	$2,000 per period
Prorated fee if agency pays day 35	$2,333
Reserve release at payment	$7,667

Eligible Contract Types

Most government contractor factors work with:

Federal prime contracts (direct contract with a federal agency)
Federal subcontracts (varies — many factors require prime contractor acknowledgment)
GSA Schedule contracts
IDIQ and task order contracts (Indefinite Delivery/Indefinite Quantity)
Cost-plus contracts
Time-and-materials contracts
State and local government contracts (varies by lender — confirm at application)

Fixed-price contracts where payment is milestone-based rather than invoice-based may be more complex to factor — confirm eligibility for your specific contract type.

Finding a Government Contractor Factor

Not all factoring companies can handle government contracts. Look for lenders that explicitly mention:

Assignment of Claims Act compliance
Federal contracting experience
Familiarity with your specific agency (DoD, civilian agencies, etc.)

Factoring companies with documented government contracting programs include:

Lender	Specialty	Notes
TCI Business Capital	Government and commercial	Strong federal contracting program. See TCI Business Capital Review.
Riviera Finance	All B2B including government	Regional offices; federal contract experience. See Riviera Finance Review.
eCapital	Government and commercial	High advance rates; federal experience
PRN Funding	Healthcare + government	Government healthcare contractors

Contact prospective factors directly and ask specifically about their Assignment of Claims experience with your target agency before applying.

SBA Contracting Financing Programs

The Small Business Administration (SBA) offers programs specifically for small business government contractors:

SBA 7(a) Working Capital Line of Credit: Revolving line of credit for government contractors, secured by the contract itself. Rates are 10–13% APR (annual percentage rate) — lower than factoring fees for ongoing use, though require stronger credit and more documentation. Learn more at the SBA funding programs page.

SBA Surety Bond Guarantee Program: Many government contracts require performance and payment bonds. The SBA guarantees surety bonds for small businesses that cannot obtain bonds commercially.

SBA 8(a) Business Development Program: Minority-owned and disadvantaged small businesses in the 8(a) program have access to set-aside contracts and additional SBA financing resources.

Learn more at sba.gov or see the SBA Loans Guide.

Alternatives to Government Contractor Factoring

Accounts receivable line of credit: Some banks offer lines of credit secured by government contracts — you retain ownership of the receivables and borrow against them. Typically requires 2+ years of contracting history and strong financials. Rates may be lower than factoring for established contractors.
Contract financing / mobilization loans: Some lenders advance operating capital at contract award — before any invoices are generated — based on the contract award letter. This covers the gap at contract start when expenses begin before delivery (and therefore before invoicing).
SBA working capital line: As noted above, SBA lines at 10–13% APR are cost-effective for ongoing use if you qualify.

Who this works for: Federal prime contractors and subcontractors (IT services, professional services, staffing, facilities, defense) billing $50,000+/month under time-and-materials, cost-plus, GSA schedule, or IDIQ task-order contracts, particularly small businesses and 8(a)/WOSB/SDVOSB firms experiencing payroll or overhead gaps between delivery and payment.

Who should look elsewhere: Contractors with 24+ months of steady federal revenue and strong financials can typically access an accounts receivable line of credit or SBA 7(a) working capital facility at 10–13% APR — significantly cheaper than factoring’s effective cost. Contractors on milestone-based fixed-price contracts should confirm invoice-based eligibility before applying.

Frequently Asked Questions

Does factoring affect my relationship with the federal agency?

The contracting officer is notified of the assignment when you factor your invoices, but this is standard practice in government contracting. Most agencies have straightforward processes for handling assignment of claims. The notice does not imply financial distress to the agency — factoring is a common, accepted financing tool for small businesses in federal contracting.

Can I factor subcontract invoices?

It depends on the factor and the prime contractor. Some factors work with subcontract receivables, but require documentation from the prime contractor acknowledging the subcontract and agreeing to pay the factor rather than the subcontractor directly. This is more complex than prime contract factoring. Confirm at application whether your specific subcontract structure qualifies.

How do I notify the contracting officer of the assignment?

Your factoring company will typically provide a Notice of Assignment form and guide you through the process. The notice is sent to the Contracting Officer (CO) and the contract's Designated Billing Office. Once received, the agency is legally required to direct payments to the factor rather than to your business. FAR 32.805 governs the form and procedure.

What is the Prompt Payment Act and how does it affect factoring?

The Prompt Payment Act (31 U.S.C. § 3901) requires federal agencies to pay invoices within 30 days of receipt and acceptance. Agencies that pay late must add interest to the payment. This means government contractor factoring has highly predictable payment timelines compared to commercial factoring — which reduces the factor's risk and contributes to lower fees.

Can a start-up government contractor use factoring?

Yes. Unlike bank loans, factoring eligibility is based primarily on your customers' (the agency's) creditworthiness, not your business history. A start-up that has won a federal contract and delivered work can factor invoices even without years of operating history or strong credit. This makes factoring one of the most accessible financing tools for new government contractors.