TLDR
Federal grants flow to nonprofits through two mechanisms: advance drawdowns (the nonprofit pulls cash before spending) and cost reimbursement (the nonprofit spends first, then requests payment). Most federal grants use reimbursement. Advance drawdowns are permitted only when justified by immediate cash need and must be drawn to need - not as a float. Nonprofits that draw more than three business days of cash-on-hand are required to hold the excess in interest-bearing accounts and remit that interest to the federal government quarterly.
BLUF
Most federal grants use cost reimbursement: the nonprofit spends first and requests payment after. Advance drawdowns are permitted but restricted to immediate need and must be disbursed within three business days. Cash held longer than three days earns interest that must be remitted to the federal government (above the $500 per-year retention threshold). Different federal agencies use different payment systems - ASAP, PMS, LOCCS - and each has its own submission workflow.
TL;DR
- Standard method: cost reimbursement - spend first, request repayment
- Advance drawdowns: permitted for immediate need only; must disburse within 3 business days
- Interest rule: advance cash held over 3 days earns interest; above $500/year must be remitted
- Payment systems: ASAP (Treasury/multi-agency), PMS (HHS), LOCCS (HUD), various agency-specific
- Cash flow gap: bridge with reserves or organizational credit, not excess advances
How cost reimbursement works in practice
Cost reimbursement is the default for most federal grants. The workflow is:
- Grantee incurs and pays an allowable expense
- Grantee submits a payment request through the applicable system (ASAP, PMS, LOCCS, etc.) with supporting expenditure documentation
- Federal agency reviews and approves the request
- Treasury or the agency disburses the payment to the grantee’s bank account
The gap between step 1 (spending) and step 4 (receipt of funds) is typically 2-10 business days once a clean request is submitted. Organizations with monthly submission cycles can face 30-45 day float periods.
Advance drawdowns: when and how
Advance drawdowns are permitted when a non-federal entity has demonstrated the ability to establish procedures to minimize the time elapsed between the transfer of federal funds and their disbursement, and when the entity operates a financial management system that meets the standards of 2 CFR 200.302.
In practice, advance authority is typically granted for:
- Startup costs at the beginning of a new award
- Organizations serving populations who cannot absorb payment delays (e.g., direct benefit payments)
- Programs with high initial capital outlay before operations begin
The three-business-day rule is strict. Federal cash must be in the hands of the end user within three business days of the transfer to the grantee’s bank. Cash sitting in a grantee bank account beyond that window is excess - and excess generates interest obligations.
The interest rule explained
2 CFR 200.305(b)(8) requires that interest earned on advanced federal funds be remitted to the awarding agency. The $500 annual threshold allows small organizations to retain a de minimis amount for administrative costs. Above $500, the full interest amount (not just the excess over $500) is remitted to the agency.
What constitutes interest: bank interest earned on the grant’s cash balance during the period it is held before disbursement. If a grantee draws $500,000 from ASAP on a Tuesday and holds $400,000 in their operating account for six days while processing payroll and invoices, the interest earned during those six days is reportable.
Organizations that routinely draw large advances and hold cash for weeks are accumulating interest obligation that surfaces as a finding when auditors calculate expected interest against bank statements.
ASAP: the most common system
ASAP (Automated Standard Application for Payments) is operated by the U.S. Bureau of the Fiscal Service and used by more than 20 federal agencies including HHS, the Department of Education, USDA, DOJ, and AmeriCorps. To access ASAP:
- The federal awarding agency enrolls the grantee and the specific grant award in ASAP
- The grantee registers an authorized account and point of contact
- Payment requests are submitted through the ASAP web portal or API
- Payments are ACH-transferred to the registered bank account, typically within 1-2 business days
ASAP supports both advance requests and reimbursement requests. The agency configures which is available for each grant enrollment.
PMS: the HHS system
HHS agencies use PMS (Payment Management System). PMS operates differently from ASAP: each grantee has a PMS account balance representing the total available funds across all HHS awards. Grantees request cash transfers from this account to their bank as needed, up to the total available balance.
The PMS structure requires careful tracking: the available balance reflects all active HHS awards in aggregate, not award by award. Grantees must maintain their own award-level breakdown to avoid drawing against the wrong award.
PMS also serves as the system for submitting Federal Financial Reports for HHS grants. The SF-425 submitted through PMS ties directly to the payment history, which auditors use to reconcile expenditures against draws.
LOCCS: the HUD system
HUD grants - Continuum of Care, CDBG, HOME, ESG, and others - use LOCCS (Line of Credit Control System). LOCCS is budget-line-item specific: grantees submit drawdown requests against each approved budget line rather than submitting a total reimbursement. This gives HUD visibility into spending by category but also creates a more granular tracking burden for grantees.
LOCCS drawdowns require documentation uploaded at submission - typically invoices, payroll records, or other cost substantiation. The review cycle for LOCCS drawdowns is often longer than ASAP or PMS due to the line-item review requirement.
Managing cash flow on reimbursement grants
Organizations without large operating reserves face real cash flow pressure on cost-reimbursement grants. Practical approaches:
Submit frequently. Monthly submission is common; biweekly is better for large-payroll programs. Waiting for quarterly submission creates 90+ day float periods that strain even well-capitalized organizations.
Use a bridge line of credit. An organizational line of credit funded from non-federal sources is a permitted tool. Interest on the line is generally allowable as an indirect cost under 2 CFR 200.449, provided the borrowing was necessary and the rate is reasonable. Document the connection between the line of credit and grant cash flow needs.
Negotiate startup advance. For new awards with high initial costs (lease deposits, equipment purchases, initial training), negotiate a limited advance at award execution. Document the immediate cash need and plan for rapid disbursement within three days.
Avoid excess advances. Draw only what will be spent within three business days. Idle federal cash is not free float - it generates an interest obligation that must be remitted.
How GrantPipe helps
GrantPipe tracks drawdown history and reimbursement status by award, giving finance teams visibility into the gap between incurred costs and recovered cash across the full portfolio. When a reimbursement request is overdue, the grant record surfaces the aging status before it becomes a cash flow surprise. The SF-425 reporting workflow pulls draw history and expenditure totals to support accurate financial reporting without manual reconciliation. Start with a free trial to manage grant cash flow alongside compliance tracking in one system.
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- Drawdown
- A request to pull federal grant funds in advance of incurring costs. Permitted only when immediately needed and must be disbursed within three business days. Governed by 2 CFR 200.305.
DEFINITION
- Cost reimbursement
- The standard federal grant payment method where the grantee incurs and pays costs first, then submits a payment request with supporting documentation to be reimbursed by the federal agency.
DEFINITION
- ASAP
- Automated Standard Application for Payments. The U.S. Treasury system used by many federal agencies to process grant payments. Grantees access ASAP through their awarding agency's enrollment process.
DEFINITION
- LOCCS
- Line of Credit Control System. HUD's grant payment system used for CoC, CDBG, HOME, and other HUD programs. Grantees submit drawdown requests against budget line items.
DEFINITION
- PMS
- Payment Management System. HHS's grant payment system used by NIH, CDC, SAMHSA, ACF, and other HHS agencies. Grantees maintain a cash balance in PMS and draw against it as costs are incurred.
DEFINITION
Q&A
How does a nonprofit maintain cash flow on a cost-reimbursement grant without drawing excess advances?
The practical approach is to submit reimbursement requests frequently - biweekly or monthly - rather than quarterly. More frequent submission reduces the cash flow gap between spending and receipt. Organizations with reserves can self-finance the gap with unrestricted funds and be reimbursed. Organizations without reserves need to negotiate advance payment authority or an advance for startup costs at award execution.
Q&A
Can a nonprofit use a line of credit to bridge the reimbursement gap?
Yes. Using organizational credit (a bank line of credit or other non-federal borrowing) to cover expenditures before reimbursement arrives is permitted. The interest cost on the line of credit is generally allowable as an indirect cost under 2 CFR 200.449, though specific award conditions may differ. Using federal funds already advanced to pay interest on an organizational credit line is not permitted.
Q&A
What documentation is required for a drawdown request?
Documentation requirements vary by system and agency. In general, a reimbursement request requires: total amount requested, the budget period, breakdown by budget category (or grant line item for LOCCS), and the period of costs being claimed. For advance requests, documentation of immediate cash need is required. Keep copies of all submitted requests and the agency payment confirmations in the grant file.
Frequently asked