How To Secure Large Contract Financing
Having a government contract or any contract with another business can give your business a lot of security. Until you realize how much work and equipment you will have do before seeing any payment. Contract financing is a new type of lending product which uses the contract as a collateral to help you find working capital quickly. Instead of turning to a loan or a credit card, learn more about contract financing.
What Is Contract Financing?
Contract financing is very similar to accounts receivable financing, or factoring. The main difference is the collateral. In factoring, your business would use its accounts receivable invoices as the collateral for the loan. With contract financing, the contract becomes the collateral. Unlike a traditional loan, your business gets quick working capital that can be used in any way you see fit. Instead of being strapped to make payroll, you have the funding to take care of business until the contractor makes payment.
Questions to Ask
This type of funding works with companies that use contracts from reliable customers. You might be a software company or server providing services to a governmental agency. Once the contract is signed, your business may be forced to update equipment or provide services before receiving payment. To see if your organization might benefit from contract financing, ask yourself and financial department these questions:
- Do you have a contractual agreement with a customer who is reliable?
- Is the contract profitable by certain margins? Typically, this figure is about 20 percent.
- Does the contract have a defined period?
- Does your business have the track record in providing services?
Types of Companies Which Do Benefit
Another company that can benefit from contract financing is an event planner, which has to pay deposits and rent equipment before receiving payment from vendors. If your organization needs liquidity or access to working capital, contract financing can help you stay competitive without stressing your vendors and clients. Seasonal businesses often find themselves having cash flow problems at certain times of the year, but that doesn’t mean the business isn’t viable.
If you believe your business would benefit from contract financing, ask your lender about it. You have nothing to lose, and you have a lot to gain. The process is quicker than a traditional loan, and it gives you working capital to move forward when your budget is already stressed. Stop worrying about money when you have the clients, but they haven’t made payment. Focus on your business, not your bank account.