Making Payroll on Net-90 Terms: Factoring for Contractors

Cleared personnel get paid every two weeks regardless of when the agency pays. Accounts receivable factoring turns 90-day invoices into same-week cash.

Payroll Does Not Wait for the Treasury

For a services-based government contractor, labor is 70% to 90% of cost of revenue. You pay your cleared engineers, analysts, and technicians every two weeks without exception, while the agency pays your invoice somewhere between 30 and 90 days after submission. Every new contract you win makes this worse before it makes it better.

This is the paradox of growth in GovCon. Winning a $6 million staffing recompete with 40 billable personnel means you need roughly $700,000 of additional working capital just to fund the lag between payroll and collections. Profitable companies fail here regularly, not from bad contracts but from the arithmetic of scaling on delayed payment terms.

Accounts receivable factoring solves the timing problem directly. You invoice as usual, the factor advances the large majority of the invoice within one to two business days, and the reserve is released when the agency pays.

Advance Rates, Fees, and What You Actually Pay

Government receivables factor well because the credit risk is minimal. Advance rates on federal invoices commonly run 85% to 93%, higher than the 80% typical for commercial receivables, because the payor is the United States government and default is not a realistic concern.

Fees are usually quoted as a discount rate per 30-day period, often 1.0% to 2.5% depending on volume, invoice size, and average days to pay. On a $200,000 monthly invoice paid in 45 days, an all-in cost of 1.8% is $3,600, or roughly 0.9% of quarterly revenue. Measured against the cost of turning down a contract you cannot fund, it is inexpensive.

Watch for structural terms rather than headline rate. Minimum monthly volume commitments, termination fees, notice periods, and whether the facility is recourse or non-recourse can matter more than 25 basis points on the discount. Angel Funding Group reviews the full fee schedule alongside the rate so you are comparing real economics between offers.

Setting Up the Facility Correctly

The setup process centers on three things: the Assignment of Claims filing so payment is legally directed to the factor, verification of your contract and delivery order documentation, and a review of your billing accuracy. That last item is more important than most contractors expect.

Invoice rejection is the leading cause of slow federal payment, and it is almost always administrative: wrong CLIN, missing receiving report, incorrect contract line item pricing, or submission through the wrong portal. A factor will scrutinize your rejection rate because their capital is at risk against those invoices.

Cleaning up billing hygiene before you approach a factor improves both your approval odds and your pricing. Contractors with sub-2% rejection rates get materially better terms than those running 10%, and the operational improvement pays dividends independent of the financing.

Combining Factoring With a Line of Credit

Factoring covers the invoice-to-payment gap, but it does not cover the pre-invoice period. On a services contract you incur two to four weeks of payroll before the first invoice is even generated, and on a mobilization-heavy contract you may incur clearance processing, equipment, and onboarding costs months in advance.

A business line of credit sized to two to four weeks of payroll fills that front-end gap. Used alongside factoring, the combination gives you continuous liquidity from the day work begins through the day the Treasury pays.

As your company matures, the goal is to migrate from factoring to a conventional asset-based revolver, which is cheaper. That transition typically becomes available once you have two to three years of profitable operating history, audited or reviewed financials, and a diversified contract base. Factoring is the bridge, not the destination.

Bidding With Confidence

The strategic value of a factoring facility is not the cash, it is the ability to bid. Contractors without working capital self-select out of larger opportunities, or worse, win them and then struggle to perform, damaging their past performance record for years.

With a facility in place you can respond to a solicitation twice the size of your current largest contract and answer the contracting officer’s financial responsibility inquiry with a letter from your financing partner. That letter changes how the government evaluates your capability.

Set the facility up before the RFP drops, not after the award. Two to three weeks of setup time during a bid response window is time you do not have, and the contractors who consistently win larger work are the ones whose capital was arranged months earlier.