The Government Contract Cash Flow Challenge
Federal contracts are among the most reliable sources of revenue available to any business — the government always pays its bills. But the timing of that payment creates cash flow challenges, especially for small businesses. You typically incur costs (labor, materials, subcontractors) weeks or months before receiving payment from the government.
Standard government payment terms are Net 30, and the Prompt Payment Act requires the government to pay interest on late invoices. In practice, many agencies pay within 15-20 days. But the gap between incurring costs and receiving payment can be significant for businesses without substantial cash reserves, especially during the startup phase of a new contract.
SBA Loan Programs
The SBA offers several loan programs relevant to government contractors. The 7(a) loan program is the SBA’s primary lending vehicle, providing loans up to $5 million for working capital, equipment, and business expansion. SBA guarantees a portion of the loan, making banks more willing to lend to small businesses.
The SBA 504 loan program provides long-term financing for major fixed assets like real estate and equipment. The CAPLines program specifically targets working capital needs for government contractors, offering revolving lines of credit, seasonal lines, and contract lines tied to specific government contracts.
The SBA Community Advantage program and microloan program serve businesses that have difficulty accessing traditional lending. These programs often work with community-based lenders who understand the government contracting market.
Government Contract Financing
For large contracts, the government itself may provide financing. Progress payments are available on contracts over $3 million (or $1 million for small businesses), paying a percentage of costs incurred as you perform. This significantly reduces the cash flow gap on large projects.
Performance-based payments are another option, where payment milestones are tied to specific deliverables or performance achievements rather than cost reimbursement. These are becoming more common and can provide better cash flow predictability.
Commercial financing arrangements, such as accounts receivable factoring (selling your government invoices to a factoring company at a discount for immediate cash) and asset-based lending, provide additional options. Government receivables are highly valued by factoring companies because of the low default risk.
Practical Cash Flow Management
Build a cash flow projection for every contract you win, mapping expected costs against expected payment dates. Identify periods where cash requirements will exceed available funds and arrange financing in advance.
Invoice promptly and accurately. Every day of delay in submitting your invoice extends the payment cycle. Ensure your invoicing process meets contract requirements (WAWF for DoD, IPP for civilian agencies) and that all required documentation is included to avoid payment delays.
Negotiate favorable payment terms with subcontractors and suppliers to align your outgoing payments with incoming government payments. Many subcontractors understand that government payment cycles create timing gaps and will work with you on terms.
Financing as a Growth Enabler
Cash flow management is as important as business development in building a successful government contracting practice. The companies that grow sustainably are the ones that plan their financing alongside their capture strategies.
Establish banking relationships and credit facilities before you need them. Understand the financing options available to you, and match the right financing tool to each contract’s cash flow profile. With proper financial planning, the reliable revenue from government contracts becomes a powerful engine for growth.