If you are a small business owner, you need to know about contract financing. This is an option that helps businesses receive a cash advance on work that has not yet been performed on a contracted job.
Your contract spells out milestones and payments based on your progress towards the project’s completion. Contract financing is different than a conventional loan because it’s underwritten based on the terms of the contract and the client’s creditworthiness instead of being based on your creditworthiness.
How Does it Work?
Typically, contract financing will advance up to 90% of the invoiced amount immediately- while the remainder (minus a fee) will be paid once the invoice gets paid. Companies that operate by agreeing to perform services/products for a project/event can use this contract as the collateral to secure the funding.
Many times, the contract will specify partial payments received as completed portions of the work are invoiced. This allows companies to avoid waiting for months to receive payment on invoices submitted to the customer.
Contract financing is a great option when the credit history of a small/medium company is lacking. If the following applies, a contract financing company is likely to approve a financing agreement with you:
-The client has a good credit rating
-A signed contract with clear milestones and payments is in place
-Your track record assures the finance company that you can get the work completed properly and on time
How to Qualify for Contract Financing
Every contract financing company will have its standards for qualifying- but typically, they will look at the following:
Time in Business
The contract financing firm will want to know how long you have been in business, which will prove to them that you can fulfill your contracts. Lenders will be more likely to work with borrowers that have been in business for some time than startups since they are lower risk. On the other hand, if you’ve been in business for a while and have a history of lawsuits/defaults, a contract financing company is not likely to work with you.
The amount that you wish to finance should have some relationship to your average monthly billing. Typically, the financing firm will want monthly revenues to be equal to what is needed to cover the advance. That is, if you are granted $20,000 for a 60-day term, they’ll expect your monthly billing to be $10,000 or more.
Customer’s Credit Rating
The finance company will advance up to 90% of the invoiced amount. Therefore, your customer should have the creditworthiness to pay their bills within the period of the advance.
Where to Get Contract Financing
You will find that there is a variety of contract financing firms out there. Just do your research and you’ll easily find them online. However, you won’t get much information from their websites. You’ll have to leave your information and they will call you back.
In most cases, banks are not involved in contract financing- they are lenders. Contract financing is not a loan, but a form of factoring.
The Small Business Administration does have a contract financing option, it’s known as Contract CAPLine Program. You can look into that for some assistance.
If you are considering contract financing, we would love to hear from you! Contact Capital Funding Source today and we’ll be more than happy to help!