To meet short term liquidity demands many companies are turning to a unique financing tool called contract lending, which allows a company to borrow against a signed customer contract. There are many types of companies that can benefit from contract financing including, fast growing companies, companies that receive a large unexpected order, companies with limited or no credit, seasonal businesses and companies that are not bankable by traditional institutions.
Unlike traditional business lending, Contract Financing loans are underwritten based on the characteristics and value of the contract that the business is borrowing against, rather than the companies credit history. This allows new companies that have not established credit, or companies with impaired credit to obtain commercial financing. Contract Financing can be an important liquidity tool for new or rapidly growing companies that are unable to obtain traditional commercial financing.
Contract Financing can be an effective financing tool for companies in a variety of industries and stages. It provides short-term capital to companies that may not be able to access traditional commercial loans or that face other liquidity challenges.
Fast-growing companies often face expanding capital needs that traditional banks or commercial lenders are unable to meet. The demand for their products or service outpaces their ability to obtain the capital they need to fuel their growth. Traditional small business financing and bank lines of credit are often too limited or do not grow quickly enough for these types of fast growth companies. This can be because the approval turn around time for a traditional small business bank loan is too slow to meet the needs of a fast growing company. A contract finance loan is collateralized by the client contract, which allows fast-growing companies the ability to more efficiently access liquidity.
Companies that are presented with an unexpected new contract or opportunity often use contract financing to help secure the new business and manage the cash flow demands that it requires. Because the approval time lines are shorter for contract financing, it allows for faster access to the short-term capital needed to secure the project. Traditional bank and commercial lenders often do not have underwriting processes that are nimble enough to respond to companies with immediate short-term liquidity needs. Contract Financing can often be a viable alternative in these situations.
Companies that are in a turnaround situation or may have a poor credit history, may also access contract financing to meet their capital and liquidity needs. Traditional small business loans or other financing options are often limited or not available for companies with impaired credit histories. Because a contract financing loan is secured by the contract, it allows the company to borrow money and obtain liquidity that might otherwise be unavailable to them.
Seasonal businesses, which often experience times of extreme spikes in sales that strain cash flow and make it difficult to manage a business, also use contract financing. Companies that have seasonal business must not only cover the payroll and material costs during the ramp up period, but also ensure they have sufficient capital to take full advantage of the busy season by ordering/producing enough product. Contract financing can help smooth these liquidity spikes and allow a company to achieve its full potential during its high season.
Finally, contract financing can be an effective option of companies that are not bankable by traditional lending institutions or cannot obtain acceptable financing from suppliers or vendors. Lending decisions in contract financing are based on the characteristics of the individual transaction. This allows companies that do not have access to traditional financing options to be approved for contract financing and receive the liquidity they need.
Contract financing is a flexible and unique lending tool that can provide liquidity to many types of businesses.