Assignment of Claims, ABL, and Contract Financing for Federal Contractors

Why Do Federal Contractors Need Specialized Financing?

Government contracts come with a paradox: the customer has perfect credit -- the United States government -- but the payment cycle creates a structural cash flow gap that can cripple even well-managed firms. Under the Prompt Payment Act, agencies have 30 days to pay a proper invoice after receipt. In practice, invoice rejections, processing delays, and post-invoice audits can extend the actual payment cycle to 60-90 days.

Meanwhile, the contractor must fund labor, materials, subcontractors, fringe benefits, and overhead from Day One of contract performance. For a firm mobilizing a $5 million annual contract, that gap can represent $800,000 to $1.2 million in upfront capital before the first dollar of revenue arrives.

Traditional bank lending often fails government contractors because banks underwrite based on hard assets (real estate, equipment, inventory) that services-focused contractors may not hold. A cybersecurity firm with $20 million in government contracts and 150 cleared employees may have almost no traditional collateral -- yet it generates highly reliable receivables backed by federal appropriations.

This guide covers the full spectrum of financing instruments available to federal contractors in 2026, from the foundational Assignment of Claims Act to modern asset-based lending, SBA programs, factoring, and mobilization funding.

"The government's credit is impeccable. The timing of its payments is not. Every financing decision in GovCon is about bridging that gap."

What Is the Assignment of Claims Act?

The Assignment of Claims Act (31 U.S.C. 3727 and 41 U.S.C. 6305) is the legal foundation that enables government contractors to use their contract payment rights as collateral for financing. Without this statute, a contractor could not legally pledge its right to receive government payment to a lender -- making most forms of receivables-based financing impossible.

How Assignment of Claims Works

1. The contractor enters into a financing arrangement with a bank, trust company, or other eligible financing institution.
2. The contractor files a written assignment with the contracting agency, the contracting officer, and the disbursing officer. The assignment must identify the specific contract, the financing institution, and the payment amounts being assigned.
3. The government acknowledges the assignment and redirects payment for the assigned contract directly to the financing institution.
4. The financing institution receives payment from the government and applies it against the contractor's outstanding balance, releasing any excess to the contractor.

Key Legal Requirements

The Assignment of Claims Act imposes specific requirements that contractors and lenders must follow:

• Eligible assignees: Only banks, trust companies, or "other financing institutions" qualify. You cannot assign claims to individuals or non-financial entities.
• Contract threshold: The act applies to contracts exceeding $1,000.
• Written notice: The assignment must be in writing and filed with the contracting officer, the surety (if bonded), and the disbursing officer.
• No-setoff protection: Once a valid assignment is filed, the government generally cannot offset amounts owed to the contractor under other contracts against the assigned payments -- though exceptions exist for fraud or overpayment on the specific assigned contract.
• Single assignee: Only one assignment per contract is permitted at any time, though the contractor can change assignees with proper notice.

When to Use Assignment of Claims

Assignment of claims is foundational -- it enables other financing instruments rather than being a standalone product. Contractors use it in conjunction with:

• Revolving lines of credit secured by government receivables
• Asset-based lending facilities where contract receivables are the primary collateral
• Factoring arrangements where invoices are sold to a factor
• SBA CAPLine loans backed by specific contract cash flows

If you have any form of receivables-based financing on a government contract, an assignment of claims is almost certainly part of the structure.

What Is Asset-Based Lending for Government Contractors?

Asset-based lending (ABL) provides credit facilities secured by a contractor's assets -- primarily accounts receivable, but also equipment, inventory, and contract rights. According to The Business Research Company, the global ABL market is projected to reach approximately $1,005 billion in 2026, growing at a compound annual growth rate of 12.8%.

How ABL Differs from Traditional Bank Lending

Why ABL Is Increasingly Important in 2026

The shift toward ABL in government contracting reflects a broader market evolution. In 2026, lenders are moving from static credit signals toward what industry analysts call "collateral intelligence" -- analyzing real-time data on how assets perform in operating environments rather than relying on traditional balance sheet metrics.

For government contractors, this means that operational metrics matter more than ever when seeking financing:

• DSO below 45 days signals efficient invoicing and healthy agency relationships
• DCAA-compliant accounting provides lenders with confidence in the accuracy of reported receivables
• Diversified contract portfolio across multiple agencies reduces concentration risk
• Clean performance record (no terminations for cause, no pending FCA investigations) reduces lender risk

A contractor with $10 million in government receivables, a 40-day DSO, and a DCAA-compliant accounting system may qualify for an ABL facility of $7-8 million (at an 80% advance rate against eligible receivables). That same contractor might struggle to obtain a $3 million traditional bank loan if it lacks hard assets.

ABL Cost Structure

ABL facilities typically carry costs in three categories:

• Interest rate: Prime + 1.5% to 3.0% (approximately 7.5-9.5% in the 2026 rate environment)
• Facility fee: 0.25% to 0.50% of the total commitment, paid annually
• Monitoring/collateral management fee: $2,000 to $5,000 per month for borrowing base administration

While ABL is more expensive than traditional bank lending on an interest rate basis, its availability and flexibility often make it the more practical choice for contractors who cannot qualify for conventional credit.

What SBA Programs Support Federal Contractor Financing?

The Small Business Administration offers several loan programs designed for -- or well-suited to -- government contractors. These programs provide government-guaranteed financing at rates and terms more favorable than conventional commercial lending.

SBA CAPLines

CAPLines are the SBA program most directly relevant to government contractors. They provide revolving lines of credit designed for businesses with cyclical cash flow patterns.

• Maximum amount: Up to $5 million
• Structure: Revolving credit that advances against specific contracts
• Term: Typically 10 years, with annual renewal
• Interest rates: Variable, typically Prime + 2.0% to 2.75%
• Collateral: Assignment of contract proceeds, accounts receivable
• Best for: Contractors who need flexible, ongoing working capital tied to specific contract performance

CAPLines come in four varieties, but the Contract CAPLine is most relevant for GovCon firms. It finances the direct costs of performing assignable contracts, including labor, materials, and subcontractor costs. Advances are tied to contract milestones, and repayment comes from contract proceeds.

SBA 7(a) Loans

The 7(a) program is the SBA's general-purpose loan program. While not designed specifically for contract financing, it provides working capital that contractors can use for mobilization, equipment, or general business needs.

• Maximum amount: Up to $5 million
• Term: Up to 10 years for working capital, 25 years for real estate
• Interest rates: Variable, typically Prime + 2.25% to 2.75%
• Approval timeline: 30-90 days (often too slow for urgent mobilization needs)
• Best for: General working capital, equipment purchases, facilities

SBA 504 Loans

The 504 program provides long-term, fixed-rate financing for major fixed assets -- typically facilities and heavy equipment.

• Maximum SBA portion: Up to $5.5 million (up to $16.5M for manufacturers)
• Structure: 50% conventional lender / 40% SBA-backed CDC / 10% borrower equity
• Term: 10 or 20 years, fixed rate
• Best for: Contractors purchasing or building facilities, acquiring major capital equipment

MARC Loans (Manufacturers' Access to Revolving Credit)

Introduced as part of the SBA's 2025-2026 program updates, MARC loans provide a dedicated pathway for small manufacturers (NAICS codes 31-33) to secure revolving credit with reduced documentation requirements.

• Structure: Revolving credit for manufacturing operations
• Eligibility: Small business manufacturers (by SBA size standards)
• Advantage: Streamlined application process with less documentation than standard SBA programs
• Best for: Small manufacturers supporting federal supply chain requirements under Buy American and Build America, Buy America Act mandates

How Does Invoice Factoring Work for Government Contractors?

Factoring is the sale of accounts receivable at a discount in exchange for immediate cash. For government contractors, factoring converts a 30-60-90 day receivable into same-week cash.

The Factoring Process

1. The contractor submits an invoice to the government and simultaneously provides a copy to the factoring company.
2. The factor advances 80-95% of the invoice face value to the contractor, typically within 24-48 hours.
3. The government pays the invoice directly to the factor (via an assignment of claims).
4. The factor remits the remaining balance to the contractor, minus the factoring fee.

Factoring Cost Structure

• Advance rate: 80-95% of invoice face value
• Factoring fee: 1-5% of the invoice amount (varies by invoice volume, government credit quality, and DSO)
• Additional fees: Wire transfer fees, due diligence fees, minimum volume requirements

When Factoring Makes Sense

Factoring is most appropriate for contractors who:

• Cannot qualify for ABL or traditional bank financing (early-stage firms, firms without audited financials)
• Need immediate liquidity and cannot wait for a lending facility to be established
• Have a small number of large invoices (the per-invoice fee structure works better at scale)
• Are growing rapidly and need to convert receivables to cash to fund mobilization on new awards

When Factoring Does Not Make Sense

• High-volume, low-value invoices: The per-invoice fee structure becomes expensive
• Established firms with ABL access: ABL is typically cheaper on a total cost basis
• Contracts with complex billing: Factoring companies may not advance against invoices that are likely to be disputed or rejected

What Is Mobilization Funding?

Mobilization funding is project-specific financing designed to cover the front-loaded costs of beginning performance on a new government contract. Unlike general working capital facilities, mobilization funding is tied to a specific contract and repaid from that contract's cash flows.

How Mobilization Funding Works

1. Contract award: The contractor receives a new government contract that requires upfront investment in labor, materials, or equipment.
2. Funding application: The contractor applies for mobilization funding, providing the contract award, performance schedule, staffing plan, and projected cash flows.
3. Underwriting: The lender evaluates the contract terms, the contractor's past performance, and the projected cash flow timing.
4. Funding: Capital is disbursed to cover direct costs -- often beginning before the contractor submits its first invoice.
5. Repayment: As the government pays invoices, the mobilization lender receives repayment from contract proceeds (typically via assignment of claims).

When Mobilization Funding Is Essential

• Large new awards that require hiring 20+ employees before first billing
• Construction and infrastructure contracts with materials procurement lead times
• Transition periods on recompetes where the outgoing contractor's staff must be onboarded rapidly
• Subcontractors who face front-loaded costs but may not receive payment from the prime for 60-90 days after the prime is paid

Specialized mobilization funding platforms provide real-time visibility into project cash flows, allowing lenders to fund direct labor and materials from Day One. This bypasses the slower SBA 7(a) approval process, which at 30-90 days is often too slow for the rapid mobilization required when agencies obligate funds quickly.

How Do You Compare Financing Options?

The following table compares the major financing instruments available to government contractors in 2026.

Cost estimates reflect the 2026 interest rate environment with a Fed policy rate of 3.0-3.25%. Actual rates depend on firm creditworthiness, contract quality, and lender terms.

Choosing the Right Instrument

If you are an established firm with DCAA-compliant accounting and a diversified contract portfolio: Asset-based lending provides the best combination of capacity, cost, and flexibility. Pair it with an SBA CAPLine for additional flexibility.

If you are a small or early-stage firm with a new contract award: Mobilization funding addresses the immediate need. Layer in factoring for ongoing receivables management until you qualify for ABL.

If you need emergency capital within 72 hours: Revenue-based financing or factoring provides speed at a premium cost. Use these as bridge financing while establishing a longer-term facility.

If you are a small manufacturer supporting federal supply chains: Explore the MARC loan program for streamlined revolving credit with minimal documentation requirements.

What Legal Risks Should Contractors Understand?

Contract financing introduces legal obligations and risks that require careful management.

Anti-Assignment Protections

While the Assignment of Claims Act enables assignment, certain contract clauses can restrict it. FAR 32.803 governs the conditions under which assignment is permitted. Contractors must verify that their specific contract does not contain a "no-assignment" clause -- and if it does, work with the contracting officer to obtain consent.

UCC Filings and Priority

Lenders will file Uniform Commercial Code (UCC) financing statements to perfect their security interest in the contractor's receivables. If multiple lenders are involved, priority disputes can arise. Contractors should maintain a clear record of all UCC filings and ensure that new financing arrangements do not conflict with existing security interests.

False Claims Act Exposure

Misrepresenting receivables, inflating invoice amounts, or providing inaccurate financial information to lenders secured by government contract receivables can create False Claims Act exposure -- not just contract breach. In the 2026 enforcement environment, where the DOJ is pursuing "compliance-based theories of liability," the accuracy of financial representations to both the government and to lenders is a compliance imperative.

Surety Bond Implications

For bonded contracts, the surety has rights that may take priority over an assignee's rights. Contractors must notify their surety of any assignment and ensure that the assignment does not violate the bonding agreement.

Key Takeaways

• The Assignment of Claims Act is the legal foundation that enables most forms of government contract financing. Understand its requirements before entering any receivables-based arrangement.
• Asset-based lending has become the preferred instrument for mid-sized and growing government contractors who have strong receivables but limited hard assets. The global ABL market is projected to reach approximately $1 trillion in 2026.
• SBA CAPLines are purpose-built for GovCon cash flow patterns. They provide revolving credit against specific contracts at favorable rates, though approval timelines of 30-60 days require advance planning.
• Factoring and mobilization funding fill the speed gap when contractors need capital faster than banks or the SBA can provide. They are more expensive but serve a critical role in contract mobilization.
• Collateral intelligence is the new underwriting standard. Clean DCAA-compliant accounting, low DSO, and diversified contract portfolios matter more to specialized GovCon lenders than traditional credit metrics.
• Legal compliance is non-negotiable. From UCC filings to surety notifications to the accuracy of financial representations, every financing arrangement introduces obligations that must be managed proactively.

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Navigating contract financing decisions requires clear visibility into your pipeline, contract performance, and cash flow projections. Aliff's intelligence platform is designed to provide that visibility across your entire contract portfolio -- from recompete predictions to pricing optimization. To discuss how our expert services team can help you structure a financing strategy aligned with your growth goals, talk to an expert.