Contract Line of Credit

Is a contract line of credit right for you?

A contract line is the most efficient structure on this page when the need recurs, and the most over-specified when it does not.

It usually fits when:

• You have won the award and expect to need capital in most billing cycles for its duration
• The need moves through stages: mobilization first, then payroll, then receivables once you are invoicing
• You are running more than one contract and want a single facility across the portfolio rather than financing each separately
• You want to draw and repay repeatedly without re-applying or being re-underwritten each time

Something else fits better when:

• You need capital for a handful of invoices rather than every cycle. Invoice factoring prices per invoice and will cost less than carrying a facility you rarely draw on
• You have not won anything yet and need to evidence capacity in a bid. That is a financial capability letter
• The requirement is a single defined purchase, such as equipment for one award. Equipment financing secured on the asset is usually cheaper

We compared the structures in detail in this breakdown of the credit products government contractors actually use, which is worth reading if you are weighing a line against factoring.

How the facility changes over the life of an award

This is the part contractors most often do not expect, and it is the argument for arranging one early rather than at the point of need.

• Stage one, mobilization. You have the award and nothing is billable. People need to reach site, equipment needs buying. The line funds against what you will bill in the coming cycle.
• Stage two, earned but unbilled. People are working and you cannot invoice yet. If performance starts on the first and the first payroll falls on the fifteenth, the facility covers that payroll before the first invoice goes out.
• Stage three, receivables. Once you are invoicing, the line advances against receivables like any asset-based structure.

The pattern from there is that the need shrinks. As retained profit accumulates, many contractors are advancing only against invoices by the end of the base year, and by year two or three are not drawing on that contract at all, having moved the facility onto newer awards.

Which is the point worth planning around: the facility you arrange for a contract you have just won is most useful in its first year, and increasingly spare after that.

What happens after you call

Underwriting looks at the award and the paying agency rather than three years of financial history, which is why it moves in days rather than weeks of committee.

• First conversation. What you have won, the period of performance, the paying agency, and where in the cycle you expect to need capital. We will tell you on that call whether a line is the right structure or whether something simpler fits.
• What we ask for. The signed contract or award letter with the statement of work, your projected cash flow for the contract, recent financials, an accounts receivable aging, and, on federal work, your SAM.gov registration and CAGE code.
• Sizing. The limit is set against the contracts and awards you hold. What you can draw against it is based on revenue you have earned, billed or not, so availability follows the work rather than your invoicing cycle. Earn more and you can draw more, which is the point: expenses rise as the work grows, and the facility rises with them.
• Existing lenders. If you have a bank line, this is where an intercreditor agreement gets negotiated so the new capital sits alongside it without disturbing senior positioning.
• Draws. Once live, you draw as costs come due and repay as the agency pays, without re-underwriting each time.

If you want to size the gap yourself before calling, the guide to funding a new award works through the arithmetic with a $10M example.

What contractors ask before committing

Can I have this alongside my bank line? Usually yes, through an intercreditor agreement setting out who has priority over what. Tell us early. A lien discovered late is the single most common cause of a slow approval.

Do I pay for capital I am not using? The facility revolves, so interest runs on what you have drawn rather than the limit. A line sized above your actual need costs you very little to carry and a great deal of stress not to have.

Does my award need to be a certain size? Less than contractors assume. The limit is set against the contracts you hold, and what you can draw is based on what you have earned, so the facility starts where your work starts. A smaller award is not a barrier. It opens a smaller limit, and that limit moves up as you win and perform more.

What if I win another contract mid-term? Facilities are frequently structured across a portfolio rather than a single award, which gives a steadier limit as contracts start and finish. Tell us what is outstanding in your pipeline and it can be sized for.

Does the agency need to know? Where payment is being directed to us, yes, through an assignment of claims. It is routine and documented and does not affect performance evaluation.

Does this work for state and municipal contracts? Yes. A contract line is sized against the award and the paying body, and a state department of transportation or a city agency is a payer like any other. Payment timelines and assignment rules vary by jurisdiction rather than following the FAR, which is something we establish early rather than late.

What to plan for

Worth stating plainly, because a facility is only as good as how it behaves when a cycle runs long.

• The ramp runs longer than planned. Badging, clearances and onboarding slip more often than they run early, and every week of slip is a week of cost with no invoice behind it. Say so when we size it rather than discovering it in month two.
• An invoice is returned. Government invoices come back for formatting and documentation problems regularly, and a returned invoice restarts the payment clock.
• A subcontractor needs paying before you are paid. Their thirty day terms against your ninety day reality is a gap inside the gap, and it becomes your performance problem rather than theirs.
• You win more than you expected. Contractors plan around a win rate and then beat it. Good problem, real one. Tell us what is outstanding and the facility can be sized for the upside.

None of these are unusual. They are the ordinary texture of contract work, and we size facilities expecting them rather than treating them as surprises.

How much does a contract line of credit cost?

A contract line prices as a facility: interest on what you have drawn, not on the limit. That is the structural difference from factoring, which prices per invoice, and it is why a line is more efficient when the need recurs and less efficient when it does not.

There is no advantage in quoting a rate here without knowing the award, the agency, the period of performance and your billing history, because those are what determine it. Tell us what you have won and you will have a number quickly.