Asset-Based Lending, Factoring, or a Contract Line?

Which credit product fits is decided by what you can pledge and how concentrated your customers are, not by how much you need.

• Asset-based line of credit: you borrow against a pool of assets, mostly receivables and sometimes inventory or equipment. Best when you have several customers.
• Invoice factoring: you sell individual invoices at a discount rather than borrowing. Best when one customer is most of your revenue.
• Contract line of credit: a revolving line built around a specific award, covering mobilization, then payroll, then receivables as the contract matures.
• Financial capability letter: not funding at all, but proof of funding, used in a bid before you have won anything.

This is drawn from episode 4 of the GovCon Funding Podcast, where I worked through these products with Matt Gillman. His explanations are quoted throughout.

Product	Secured by	Fits when
Asset-based line	A pool of receivables, sometimes inventory and equipment	You have several customers and mixed assets
Invoice factoring	Individual invoices, purchased not borrowed against	One customer is most of your revenue, or you want no monthly payment
Contract line of credit	A specific award, across mobilization, payroll and receivables	You have won a contract and need capital at each stage of it
Financial capability letter	Nothing. It evidences a facility	You are bidding and have to show financial capability

Two things that apply to all of them

Both concepts below run through every product in this article, so they are worth settling before the products themselves.

What a receivable actually is

Worth stating plainly, because plenty of excellent operators are not accountants. A receivable is work you have delivered, invoiced, and are waiting to be paid for.

Lenders like receivables because they are short-term. On net 30 terms, the money is expected inside a month. But the invoice date is not when your spending started.

“That 30 day net term might be 90 days or 120 days of cash outlay.”

A manufacturer buys raw materials, produces, packages and ships, all before the invoice exists. That gap between when you spend and when you collect is the entire reason these products exist.

What a lender watches. If receivables are the primary asset, the lender is watching the trend of how they pay. Are you being paid in the 30 days your terms say, or is it extending to 45, then 60? Slowing of payments can be the early signal of a problem.

There is a point Matt makes in the episode that is worth repeating:

“We’re on the same team as our customer. We want that bill to get paid. Our customer wants that bill to get paid.”

A lender who monitors your customers is doing credit work you should otherwise do yourself. That includes flagging when a large, apparently safe customer starts paying its other vendors late, or stretches from 30 days to 48, which is information most contractors have no way to see.

How advance rates work

An advance rate is the share of an invoice you receive up front. The clearest comparison is a mortgage: put 20 percent down and the lender provides 80. Same idea in reverse.

On a $100 invoice at a 90 percent advance rate, you receive $90 now. When the invoice pays, the remaining $10 is released to you, less the fee.

The reserve is not a fee. This is the single most common misunderstanding, and it makes the product look several times more expensive than it is.

“To be clear, if there’s a 90 percent advance rate, that’s not a 10 percent fee. That’s just a reserve that then later gets released.”

The reserve exists because invoices sometimes pay short. Something was billed wrong, or product arrived damaged. Holding a reserve is simpler than advancing the full amount and then chasing the difference. On government work, where what you bill is generally what you get paid, the advance rate is often increased over time.

Asset-based line of credit

An asset-based line looks at your collateral first. A term loan or cash flow loan looks at your cash flow first. That difference decides which businesses can qualify.

A manufacturer typically has plant, machinery, equipment, raw materials, inventory and receivables to pledge. A services contractor, which most government contractors are, usually has one asset that matters: receivables.

How the limit is set. Your available credit is a formula against what you own, not a fixed number:

• Around 85 percent against outstanding receivables. A million dollars of receivables gives you roughly $850,000 to draw.
• Around 50 percent of finished goods inventory at cost. A million dollars of inventory gives you roughly $500,000.

Why it takes more monitoring than a property loan. The collateral moves. Receivables change daily, inventory is produced and sold. Compare that to real estate, where a million dollar building is worth roughly that tomorrow and needs almost no monitoring. An asset-based line requires ongoing reporting because the borrowing base is a moving target.

Invoice factoring

Factoring is not a loan. You are selling an invoice at a discount rather than borrowing against it. That single contractual difference produces most of the practical differences.

How the money moves. Take a $10,000 invoice. A factoring company advances most of it immediately and charges a fee that accrues for as long as the invoice stays outstanding. On an invoice the agency pays inside 30 days, that fee is the cost of having the money now rather than waiting out the month.

The part contractors value most is the repayment shape. A term loan has monthly payments. A line of credit has interest due monthly. Factoring has neither.

“With invoice factoring, there are no payments. We’re waiting for the invoice to pay.”

When factoring fits better than a line. Customer concentration is usually the deciding factor. If 70 percent of your revenue comes from one place, factoring individual invoices is the natural structure. If you have ten, twenty or thirty customers, it is simpler for everyone to treat them as one pool and lend against the pool.

High concentration is common on a first award or first subcontract, and it does not disqualify you. It points you toward a different product.

Is 2 percent expensive? Two percent is what an invoice costs when it runs to about 60 days. Whether that is expensive depends what you compare it to, and the useful test is one Matt puts to contractors directly: if your customer offered to pay you today in exchange for a 2 percent discount, would you take it? Almost everyone says yes, at least when they need the money.

Which is the real point. These are options, not obligations. You do not have to draw on a facility you have arranged.

Contract line of credit

A contract line is a revolving line built around the shape of a government contract rather than around your financial history. It is really several products inside one facility, released in the order a contractor needs them.

Stage one: mobilization. You have the award and have not billed anything. People need to get to site, laptops and equipment need buying. A mobilization advance covers it against what you will bill in the coming cycle.

Stage two: earned but unbilled. People are working, but you cannot invoice yet. This is payroll funding. If the contract starts January 1 and the first payroll falls on January 15, the facility funds that payroll before the first invoice goes out in February.

Stage three: receivables. Once you are invoicing, the line advances against the receivables like any asset-based structure.

How it changes over the life of the award. The pattern is worth understanding, because it is the argument for arranging one early. As profits accumulate, the need shrinks. By the end of the base year, many contractors are advancing only on invoices rather than payroll. By year two or three they may not be drawing on that contract at all, having moved the facility onto newer awards.

“The reason that we have this contract line is to solve for the pain points along the way that we know a GovCon is going to face.”

Financial capability letters

The fourth item is not funding. It is proof of funding, and it belongs in a bid rather than after an award.

A lender provides a letter confirming you have a facility and the financial capability to perform, which goes in with your proposal alongside your technical case. Some solicitations require one. You may see it called a financial feasibility letter.

Why the contracting officer cares. You are not the only one asking how you will pay for forty new hires. The contracting officer is evaluating exactly the same risk.

A contracting officer has to satisfy themselves that you can actually perform. A letter from a lender speaks to that in a way your own balance sheet cannot, because it is a third party prepared to support the work, from a financial standpoint.

It also answers “what if I win?” Contractors with several proposals outstanding tend to plan around an expected win rate. Winning more than expected is a good problem that can become a serious one.

“If I win everything I’ve got, I don’t know how I’m going to support this.”

Working through a capability letter in advance means you know what can be supported before you submit, rather than discovering the answer after you have won.

Bank or private credit?

There is a common assumption that asset-based lending and factoring are what you settle for when a bank says no. That is not what they are.

“These products are not unbankable products. Banks offer asset based lines of credit and they offer contract lines. They offer invoice factoring. They just don’t really offer it into the small business community. They offer it into the middle market community.”

The structures exist inside banks. The question is whether you are large enough for a bank to run them for you, and some banks publish that threshold outright: among Virginia banks that lend to government contractors, one targets companies from $50 million in revenue and another from $10 million. Private credit took products built for the middle market and made them available to smaller businesses.

So the real question is not bank versus alternative. It is which structure fits, and then who will provide it at your size.

Arrange it before you need it

The strongest operators apply when they do not need the money. That is not a cliche about discipline. It is about what happens to your options when the timeline compresses.

“A three day gap in an invoice payment can be the difference between making and not making payroll.”

Something has to cover that gap: a bank line, factoring, or cash reserves you can draw on. Without one of those, the fallback is applying online for whatever is fast, which is usually expensive and often damaging.

Arranging early also protects your negotiating position. A contractor talking to a lender at the last minute has few options and little leverage, which is bad for both sides of the conversation.

If you have just won an award and need the order of operations rather than the menu, start here.

Common questions

Is invoice factoring a loan? No. You are selling the invoice at a discount rather than borrowing against it, which is why there are no monthly payments. Repayment happens when your customer pays.

Does a 90 percent advance rate mean a 10 percent fee? No. The remaining 10 percent is a reserve, released to you when the invoice pays, less the actual fee. The fee accrues for as long as the invoice is outstanding, so the faster the agency pays, the less it costs.

What is the difference between an asset-based line and invoice factoring? An asset-based line is a loan against a pool of assets. Factoring is the purchase of specific invoices. Concentration usually decides which fits: factoring suits a contractor whose revenue is dominated by one customer.

Can I get financing if one customer is most of my revenue? Usually yes. High concentration is normal on a first award or subcontract. It does not disqualify you, it points toward invoice factoring rather than a pooled line.

What does a bank offer that private credit does not? The products are largely the same. Banks run asset-based lines, factoring and contract lines, but generally for middle market companies rather than small businesses. Private credit provides the same structures at smaller sizes.