Factoring vs. a Line of Credit for Government Contractors

A line of credit feels flexible because you draw and repay as needed, but its ceiling is set by your balance sheet and fixed until the bank says otherwise. For a government contractor that is the catch: the moment you win a larger award, your working-capital need jumps and your limit doesn't.

Raising the limit means updated financials and another credit review, usually right when you need cash to staff up. Meanwhile every dollar drawn accrues interest and requires minimum payments, whether or not the agency has paid you yet. Federal payment timing makes that worse; see how government contractors get paid.

"Factoring line of credit" is a common name for a factoring facility: an approved arrangement with a funding partner that sets your advance rate, fees and eligible customers, then funds each invoice as you submit it. It behaves like a credit line because you draw on it when you bill, but it is not a loan.

The difference is what sets the size. A bank line is sized by your financial statements. A factoring facility is sized by your eligible receivables, so it grows as you invoice more. Encore advances 80 to 90% of invoice value with no fixed cap. See government invoice factoring, explained for how it works on federal contracts.

When you invoice more, you have access to more working capital automatically, with no re-application and no new committee review. Once your account is active, each approved invoice is funded the same or next day.

Because underwriting leans on your customers' ability to pay, factoring is open to newer and fast-growing contractors who would hit a wall with a bank. There is no monthly payment: the advance settles when the agency or prime pays, and you receive the remaining balance less the fee.

The two are priced differently, so compare the total cost for the same need. A line of credit charges interest on what you draw, for as long as it is drawn, plus any facility fees. A factoring facility charges a fee per invoice funded and nothing on invoices you choose not to fund.

For short, predictable gaps a bank line is often cheaper. For a fast-growing receivables gap that a bank won't size, factoring is often the only line large enough. Try the factoring rate calculator to see the advance, reserve and fee on a sample invoice.

A bank line is a good tool for small, recurring, predictable shortfalls, like bridging a slow week or a modest seasonal dip, when your needs stay comfortably under the limit and your financials qualify.

For the receivables gap unique to GovCon, where a single new task order can double your working-capital need, a fixed limit becomes a bottleneck.

Many contractors keep a small bank line for incidentals and use factoring to fund the receivables that actually scale the business. If you do, check that the bank's lien and covenants allow a factoring facility on your receivables, and line up the paperwork before you need it. Federal contracts also need the Notice of Assignment filed under the Assignment of Claims Act, so the facility can't be set up overnight.

Encore brings 30+ years of specialty finance experience and $35B+ in total funding provided. Whether you are a prime on a large IDIQ or a subcontractor on a single task order, the funding scales with your pipeline.