Government contractors usually borrow on an asset-based line against billed receivables from agencies and prime contractors. Lenders typically advance 80% to 90% of eligible invoices, and many relax the single-customer cap for a federal agency because the payer's credit is not the risk. What is at risk is getting paid: whether the lender holds a proper assignment of claims or controls the account the government pays into, whether the government can set off a tax or overpayment debt, and how much of the collateral is unbilled cost, withheld fee or provisional billing that is not yet a firm invoice.
- Collateral
- Billed receivables from agencies and primes; little else on most service contractors
- Advance rate
- Typically 80% to 90% of eligible receivables
- Concentration
- Often relaxed for a federal agency; a prime contractor is usually capped like a commercial customer
- Usually ineligible
- Unbilled costs, withheld fee, retainage, invoices on stopped or terminated work
- What lenders check first
- Assignment of claims or payment-account control, and federal tax standing
- Reporting
- Monthly or weekly borrowing base, aging and an updated contract schedule
Where the cash goes before the government pays
Most government contractors sell labor: engineers, analysts, technicians, guards, maintenance crews, program staff. The labor is paid every week or every other week. The invoice for it goes out after the billing period closes, usually monthly, and it has to be accepted by the agency's contracting officer's representative before the payment office will release it. Under the federal Prompt Payment Act an agency generally pays within 30 days of receiving a proper invoice, and pays interest if it is late, so federal money is reliable. But a contractor is still carrying somewhere between one and two months of payroll at any given time, and more if invoices bounce back for a missing line item or an unapproved timesheet.
That carrying cost scales with the backlog. Every new task order means recruiting and paying a team for a full billing period before the first invoice can go out, so owners who have just won the biggest contract in the company's history are often the ones asking their bank for more room. The general method for turning that cycle into a line size is in how lenders size a working capital line; what follows is what changes when the customer is the government.
A new award, month by month
Take a time-and-materials task order that will cost the contractor 400 a month in wages, fringe and overhead, and bill the agency 500 a month. The line advances 80% of eligible receivables. Only a billed invoice is eligible; hours worked but not yet invoiced are not.
| Point in time | Cost paid to date | Eligible receivable | Borrowing available at an 80% advance | Funded from the contractor's own cash |
|---|---|---|---|---|
| End of month one, before invoicing | 400 | 0 | 0 | 400 |
| First invoice accepted | 400 | 500 | 400 | 0, once the draw is taken |
| End of month two, second invoice out | 800 | 1,000 | 800 | 0 |
| First invoice paid, second outstanding | 800 | 500 | 400 | 0; collections repay the line |
The line funds the steady state well, because a billed federal invoice is strong collateral. It does not fund mobilization: the first billing period on every new award comes from the company's own cash or a separate facility, which is why fast-growing contractors run short with an unused line. A contractor with several awards starting in the same quarter should plan for the stacked mobilization cost, not the average.
A line of credit carries invoices. It does not carry the first month of a new contract; plan cash for that separately.
Getting paid: assignment of claims and the payment account
A commercial lender with a UCC-1 on a company's receivables can, if it has to, notify the customers and collect directly. Federal receivables do not work that way. The Assignment of Claims Act makes an assignment of money due under a federal contract void against the government unless it follows the Act: the assignment runs to a bank, trust company or other financing institution, covers all unpaid amounts under that contract, goes to a single assignee, and is filed with the contracting officer, the disbursing office and any surety on the contract. Until that is done, the government can pay the contractor and be fully discharged, whatever the loan documents say.
Lenders handle this in one of two ways, and many use both:
- A formal assignment of claims on the larger contracts. The contractor signs the instrument, the lender files the notices, and the contracting officer acknowledges them. Payments on that contract then go to the lender. It takes paperwork on every contract and every new award, and some lenders only require it above a size they set.
- Control of the payment account. The government pays by electronic transfer to the bank account in the contractor's federal registration. Lenders require that account to be a collection account under a deposit account control agreement, often with cash dominion, so collections sweep to the line. The lender will also ask to be told before anyone changes the banking details in that registration.
The formal assignment has a second benefit. Some contracts carry a no-setoff commitment, which stops the government from reducing payments to the assignee to recover the contractor's unrelated debts. Most contracts do not, so lenders look hard at the contractor's federal tax standing and any overpayment demands, because the government can recover those out of the very payments the line depends on. Unpaid payroll taxes are the most common version of this problem; whether refinancing can clear them and what a federal tax lien does to a loan are covered separately.
What counts in a government contractor's borrowing base
The general rules are in eligible vs ineligible receivables and how a borrowing base works. Government work produces receivable types of its own, and lenders price each one by how certain it is to turn into cash.
| Receivable or asset | Typical treatment | Why |
|---|---|---|
| Billed and accepted invoice to a federal agency, within terms | Eligible; the single-customer cap is often relaxed or waived | The payer's credit is not in doubt; collection mechanics are |
| Billed invoice to a prime contractor, for a subcontractor | Eligible, subject to the prime's credit and a normal concentration cap, commonly 20% to 25% of eligible receivables | The prime, not the government, owes the money, and pay-when-paid terms can stretch it |
| Invoices more than 90 days past invoice date | Ineligible | A federal invoice that old is usually rejected, disputed or caught in a funding problem |
| Unbilled costs on cost-type and time-and-materials work | Ineligible, or a small sublimit at a lower advance | Work done but not yet invoiced or accepted |
| Fee withheld until contract closeout, and retainage | Ineligible until released | Paid only after audit or final acceptance, sometimes years later |
| Billings at provisional indirect rates above the likely final rates | Eligible, with a reserve for the expected refund | An audit can turn part of what was collected into money owed back |
| Invoices on work under a stop-work order or a termination | Ineligible or reserved | Payment waits on a settlement, not an invoice cycle |
| Inventory and work in process on contracts with progress or performance-based payments | Excluded | Under those payment clauses, title passes to the government |
Each of these ends up as either an ineligible or an availability reserve, and together they explain why a contractor's borrowing availability is often well below its receivables on the balance sheet. The concentration limit is the one rule that often works in the contractor's favor: a lender that caps a commercial customer will frequently let a single federal agency make up most of the base. It will rarely do the same for a single prime contractor; a large, highly rated prime may get a somewhat higher cap, but a subcontractor whose work flows through one prime should expect the cap to bind.
Contract type changes the cycle
Lenders ask for the contract schedule early because the type of each contract tells them how its receivables behave.
| Contract type | How cash moves | What a lender watches |
|---|---|---|
| Firm-fixed-price | Billed on delivery or milestones; costs can run well ahead of billing | Milestone timing, cost overruns the contractor absorbs, progress-payment title |
| Cost-reimbursable | Costs billed as incurred, at provisional indirect rates, plus fee | Unbilled costs, withheld fee, the state of the accounting system and incurred-cost audits |
| Time-and-materials or labor-hour | Hours billed at fixed rates each period | Timesheet approval, invoice rejections, how much of the base is unbilled at month-end |
| Federal construction | Progress billings with retainage; payment and performance bonds are required on all but small contracts | The surety's claim on contract proceeds, and the intercreditor terms with the lender |
Construction contractors on federal work sit between two lenders' worlds: the surety that bonds the job has rights to the contract proceeds if the contractor defaults, so the line lender and the surety have to agree who is paid first. That is covered in more depth for general contractors. For an award the contractor has not started billing, the funding question is different; see borrowing against a signed contract or backlog.
The federal calendar
Government work is not seasonal the way landscaping is, but it has a calendar. The federal fiscal year ends on September 30, and agencies award a large share of their work in the final quarter, so contractors often mobilize new teams just as the new fiscal year begins. That new year frequently opens under a continuing resolution, which funds existing work but can hold back new starts and option exercises until a full appropriation passes.
If appropriations lapse, agencies stop work on affected contracts and payment offices can stop paying. Receivables then age toward the ineligibility cutoff while payroll continues, so availability falls exactly when it is needed. Some lenders will grant a temporary over-advance through a shutdown; none is obliged to, and the terms are easier to settle before one starts. A cushion of excess availability through the fall absorbs both events.
Covenants and reporting
The financial covenants look like any other asset-based line: usually a fixed charge coverage test, often a springing one that applies only when availability runs low. Larger contractors with steady earnings sometimes qualify for a cash-flow revolver instead, where senior lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA across all senior debt; the trade-offs are in asset-based vs cash-flow lines. Banks lending on cash flow commonly look for debt service coverage of at least 1.25x.
The reporting is where government work differs. Beyond the borrowing base certificate and aging, lenders commonly require:
- An updated contract schedule: agency or prime, contract type, period of performance, remaining option years, funded value and ceiling.
- Prompt notice of a cure notice, show-cause notice, stop-work order, termination, or a proposed suspension or debarment.
- Notice when a major contract comes up for recompete, and of the result.
- Copies of any audit findings or rate adjustments that could create a refund to the government.
- Consent before a contract is novated to another entity, or before the company's bank registration changes.
The recompete item matters more than owners expect. A largest contract ending in eighteen months, with no certainty of winning it again, gives the borrowing base a visible end date, and a company that has outgrown its small business size standard may not be able to bid the same work again. The full list of typical terms is in the covenants on a line of credit.
What trips contractors up, and how to prepare the file
- Payment going to the wrong account. The government pays whatever account the registration names. If that is not the lender's collection account, the line is effectively unsecured on its best collateral.
- A tax or overpayment debt. Setoff comes out of the receivables, and lenders reserve for any exposure they find.
- Unbilled balances that never get billed. Late timesheets, missing contract modifications and invoices rejected for format shrink the base every month they persist.
- One prime, or one contract. A subcontractor dependent on one prime, or a prime dependent on one recompete, carries risk a lender will price into the cap and the size.
- Unallowable costs treated as billable. Costs the government will not reimburse, such as entertainment or certain bonuses, reach the base as receivables and come back out as disallowances after an audit.
The documents are Transparent's standard line-of-credit checklist: an AR aging by customer with days outstanding, an AP aging, the balance sheet, the P&L and a year-to-date P&L, and a debt schedule showing existing liens. For government work, add the contract schedule, the payment clauses of the major contracts, indirect rate submissions for any cost-type work, and evidence that federal taxes are current.
Of the 1,800+ lenders in Transparent's book, 235 write asset-based lines and revolving credit, and they differ widely on federal receivables, unbilled costs and assignment of claims; some treat government work as a specialty and others avoid it. Once the documents are in, Transparent builds the full lender package in a day. For contractors that also want an SBA option, SBA CAPLines includes a contract line; it sits inside 7(a), so the $5 million 7(a) ceiling applies.
Common questions
- Does the government have to approve my line of credit?
- No. The government does not approve the loan. If the lender takes a formal assignment of claims on a contract, the contracting officer and the disbursing office receive notice and acknowledge it, and payments on that contract then go to the lender. The contract must not prohibit assignment.
- Can a subcontractor get a line of credit against what the prime owes it?
- Yes. The receivable is owed by the prime contractor, not the government, so the lender looks at the prime's credit and applies a normal concentration cap. Pay-when-paid terms in the subcontract can slow collections, and lenders read those clauses before setting eligibility.
- Will a government shutdown freeze my line of credit?
- The line itself stays in place, but invoices on affected contracts stop being paid and age toward the ineligibility cutoff, so availability can fall while payroll continues. Some lenders grant a temporary over-advance; it is easier to agree before a shutdown than during one.
- Can I borrow against my backlog or a contract I just won?
- Not on an ordinary receivables line, which only counts billed invoices. Contract financing and the SBA CAPLines contract line lend against a signed contract before billing begins, usually with tighter controls on how the money is spent.
- Do lenders care that I am a small business or in a set-aside program?
- They care about what happens at recompete. If the company has outgrown its size standard or is leaving a set-aside program, it may not be able to bid its current work again, and the lender will size the line against the contracts that remain.