Government Contract Financing: Federal, State & Local
The U.S. government is one of the best-credit customers on earth. It is also one of the slowest-paying. Specialized contract factoring is what bridges those two facts.
Government contractors live with a particular tension: your customer's creditworthiness is essentially perfect, and your payment cycle is essentially terrible. Net-30 turns into net-60 turns into net-90 once you factor in invoice processing, prime-to-sub flow, and the occasional government shutdown. The right product is a specialized variant of factoring — government contract financing — that advances up to 90% of contract value, prices at Prime + 2–8%, and funds in 10–20 business days. It's a cousin to commercial factoring but underwritten differently, because the lender is reading the contract itself, not just your AR aging. This matters most for subcontractors. If you're a sub waiting on a prime to get paid by the government, standard commercial factoring often will not touch the deal — too many handoffs, too much dependency on someone else's paperwork. Specialized contract financing reads through that structure and underwrites against the underlying federal, state, or local award. Subs on GSA, DoD, and state contracts who can't get conventional factoring can usually get this. Deals run from $250K up to $50MM and beyond. Approval typically lands in 5–10 business days, funding inside 20. Retainage structures (where the government holds back 5%–10% of contract value until completion) are common and lenders price for them; they do not break the deal but they do tighten the borrowing base. We also see prime contractors on long-cycle awards layer in bridge capital and equipment financing for the upfront materials and labor before the first invoice generates. For smaller contractors, a revenue-based working capital line sometimes makes more sense than contract factoring — it's faster, it's cheaper for short bursts, and it doesn't require the contract assignment paperwork. The cleanest answer depends on the size of the award, how long the cycle is, and how clean the contract documentation reads.
The cash-flow challenges government contractors actually face
- •Net-30 to net-90+ payment cycles on government contracts, often stretching to 120+ days with processing time and disputes
- •Subcontractors waiting on prime contractor payment add another full payment cycle on top of the government's
- •Retainage structures (5%–10% withheld until contract completion) tie up working capital for months after the work is done
- •Upfront materials, labor, and mobilization costs hit before the first invoice can be generated
- •Standard commercial factoring often won't touch subcontractor deals because of prime-to-sub payment dependency
- •Government shutdowns and continuing resolutions create payment delays that bank lines aren't designed to absorb
- •Bid bond and performance bond requirements compete with working capital for the same dollars
What usually fits — ranked
Government Contracts
Purpose-built for this. Advances up to 90% of contract value against federal (GSA, DoD), state, or local awards. Prime + 2–8%. Underwrites against the contract itself, which is why subcontractors can qualify here even when standard factoring won't touch the deal.
Invoice Financing
For prime contractors with clean commercial-style invoicing and shorter cycles, standard factoring still fits. 85%–90% advance, 24–48 hour funding once onboarded.
Working Capital Loans & Lines of Credit
For smaller contractors or short-burst capital needs (covering mobilization, payroll on a new task order), revenue-based capital funded in days at 10%–15% of revenue beats the paperwork cycle of true contract financing.
Asset-Based Lending
At scale, established government contractors with multiple awards, AR, and equipment graduate to a single ABL line covering the whole picture at Prime + 1–4%.
Bridge Funding
Short-term, often interest-only capital to cover upfront materials, labor, and mobilization before the first contract invoice generates. Closes in days, exits when the contract pays.
Equipment Leasing & Financing
For specialized equipment required by a specific contract — generators, vehicles, IT infrastructure. 60–84 month terms typical so monthly debt service matches the contract life.
How this plays out in practice
A federal subcontractor doing $5MM in annual revenue across a handful of DoD task orders runs on net-60 payment terms from a prime, who in turn waits net-30 to net-45 from the government — so the effective payment cycle to the sub stretches 90 to 120 days. Payroll is weekly. The bank declined a line of credit because the contract concentration looked too risky and the sub's tax returns showed losses two years ago during a slow period. The structure is a $2MM specialized contract financing facility advancing 85% against the eligible task order receivables, priced at Prime + 5%. Approval lands in eight business days, first funding inside three weeks. The lender takes assignment of the receivables (via a federal Assignment of Claims Act filing for the DoD work), sets up a controlled account for payments, and works directly with the prime's AP team to confirm invoice acceptance. The outcome: the 90-to-120-day cycle becomes a 48-hour cash conversion on each accepted invoice. The sub takes on two additional task orders inside the first six months because the cash flow finally supports the staffing ramp. Two years later, with cleaner financials and a more diversified contract base, the facility resizes and migrates to a conventional ABL structure at lower pricing.
How Michael thinks about government contractors
“We are like a broker that represents our clients to the lending world, alternative from banks, because there's a lot of players out there, good players, bad players, different kinds of players, and different kinds of solutions, of course.”
— Michael Kodinsky, Founder of Serve Funding · Mike on why an advisor matters in a specialized corner like government contract financing — the lender universe is small, the structures are technical, and the players vary widely in quality.
“I'd rather under promise and over deliver and not the other way around.”
— Michael Kodinsky, Founder of Serve Funding · Mike on managing expectations through government contract diligence cycles, which often run longer than commercial deals because of contract assignment paperwork and federal documentation.
“We're a, sort of funding is our own, my wife and I work it together. It's a business financing advisory. We're not a direct lender. We are like a broker that represents our clients. Bankers that we partner with are often introducing us when a client has a need that the bank can't fulfill for one reason or another.”
— Michael Kodinsky, Founder of Serve Funding · Mike's company intro. Government contractors are one of the most common bank referrals — banks like the credit quality of the customer but can't size to the payment timing.
What doesn't usually fit (and why)
Half of being useful is being honest about what doesn't work. These are products we generally don't recommend for government contractors — and the reason.
Most government contracts aren't inventory-heavy. The cost being carried is labor, services, and materials consumed in performance — which is what contract financing handles directly.
PO funding is built for commercial purchase orders with a finished-goods delivery and an invoice cycle. Government task orders and IDIQ structures don't usually fit that mold cleanly.
