Invoice Factoring

Is invoice factoring right for your business?

Factoring is the right answer for a narrower set of situations than most lenders will admit, and knowing which side you are on saves everyone a call.

It usually fits when:

• You have already performed and invoiced, and the only thing missing is time
• One agency or one prime is most of your revenue, which makes a pooled facility awkward and an invoice-by-invoice structure natural
• You are on a first award or first significant subcontract, without the performance history a line would want
• You want no monthly payment, because settlement happens when the agency pays rather than on a schedule you have to plan around
• The need is uneven: heavy in some months, absent in others

Something else fits better when:

• You have not invoiced yet. Nothing can be factored before there is an invoice, so the startup costs of a new award are mobilization funding
• The gap is payroll before the first invoice. That is payroll funding
• You need capital at every stage of the award, from mobilization through receivables. That is a contract line of credit
• You are still bidding and need to evidence financial capability. That is a capability letter, which is proof of funding rather than funding

If you would rather work it out yourself first, this breakdown of the credit products government contractors actually use compares them side by side.

Do you have to factor every invoice?

This is the question most contractors ask, and it hides two separate questions with different answers.

Where the money goes is fixed. An assignment of claims directs all amounts due under a contract to a single assignee. Every invoice on an assigned contract pays to the same place, and that part cannot be structured around. It also means one contract cannot be split between two lenders, although you can assign one contract and leave another alone.

What you pay for is not. Whether to take an advance against any individual invoice stays your decision. An invoice you take no advance on carries no fee, and when the agency pays it the money passes through to you.

In practice that means the facility can sit across the whole contract while you only pay for the cycles you actually draw on. Many contractors use it heavily in the first months of an award and barely at all by the second year, as retained profit starts covering the cycle.

What happens after you call

The process is built around the contract rather than your financial history, which is what lets it move in days instead of the weeks a credit committee takes.

• First conversation. What the award is, who the paying agency is, what you have already billed and what you need. Fifteen minutes, and we will tell you on that call whether this is the right product.
• What we ask for. The contract or award letter, an accounts receivable aging, your invoicing history with the agency, and, on federal work, your SAM.gov registration. If you have an existing bank line, we need to know, because it determines whether an intercreditor agreement is needed.
• Underwriting. We are assessing the agency’s obligation to pay and your receivables, not three years of statements.
• Assignment. Payment on the contract is formally directed to us. It is routine and documented, and it runs on the agency’s clock, which is why we start it early rather than at the end.
• Funding. Once the facility is live, you send the invoices you want advanced and they fund without re-underwriting each one.

The single biggest cause of delay is vagueness. "I need working capital" cannot be underwritten. "I need $180,000 by March 3 against a VA award I started billing in January" can be, and usually quickly.

What to plan for

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

• An invoice gets kicked back. Government invoices are returned for formatting and documentation problems more often than contractors expect, and a returned invoice restarts the payment clock.
• A subcontractor needs paying before you are paid. Their cash problem becomes your performance problem. Worth flagging when we size the facility rather than discovering it in month two.
• You win more than you planned for. If several proposals are outstanding, say so early and we can size for the win rate rather than the current award.

None of these are unusual. They are the normal texture of government contract work, and we underwrite expecting them rather than treating them as surprises.

How much does invoice factoring cost?

Factoring is priced on the invoices you advance against and how long each one is outstanding, so the faster your agency pays, the less it costs, and an invoice you leave alone costs nothing. There is no monthly payment, because settlement happens when the agency pays rather than on a schedule.

Part of each advanced invoice is held back as a reserve, not a charge, and released to you when the agency pays, less the fee. Reading the reserve as the cost is the most common misunderstanding, and it makes the product look several times more expensive than it is. How government invoice factoring works walks through the reserve and the assignment step by step.

Rates are quoted against your contract, agency and billing history rather than off a rate card, because those are what determine the risk. Tell us the award and the amount and you will have a number quickly.