Contract Financing is an opportunity for companies to access working capital by using the proceeds from an in-progress or upcoming project as collateral for a loan. 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 is easy to understand. A company has a signed guaranteed contract/agreement or stipulated sum with a business or government agency, but they lack all or part of the funds necessary to begin or complete the project. Contract Financing uses the contracted payments as collateral for a loan and provides the company the short-term liquidity needed to complete the project. Companies can receive up to 100% of the cost to complete the project in the form of a Contract Financing loan from Abington Emerson Capital.
How It Works
Applying for Contract Financing is easy. Contact Abington Emerson Capital once you have a signed contract or agreement with a business or government entity. We will require a copy of the contract, documents concerning the legal formation of your company and your company’s financial statements. Our evaluation will be based on the reputation/characteristics of your client, the legal standing of the company, the company’s track record and expertise in the industry and the profitability of the project.
Abington Emerson Capital will review the documentation and provide a response to your loan request in as little as a week and fund approved loans in as little as 24 hours. Contract Financing is a fast, flexible and efficient way to create short-term liquidity for your company.
Scenarios When Contract Financing Can Help
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. There are some common characteristics of companies that can benefit from Contract Financing. Companies that utilize Contract Financing can be:
Fast-growing companies often face expanding capital needs that traditional banks or commercial lenders are unable to meet. The scenario may be that 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 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.
Also, if a company is experiencing a dramatic growth in their business, the true financial strength of the company may not be accurately reflected in their most recent financial statements, which is often the primary tool traditional business lenders use to assess creditworthiness. Contract Financing is collateralized by the client contract, which allows fast-growing companies the ability to more efficiently access liquidity.
Need Funds Fast
Companies that are presented with an unexpected new contract or opportunity use Contract Financing to secure the new business. 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 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 those situations.
Limited or Impaired Credit History
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 the 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 business often experience times of extreme spikes in sales that strain cash flow and make it difficult to manage a business. Companies that are in a 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 to its full potential during its high season.
Not Bankable or Unable to Obtain Vendor Credit
Companies that are not bankable by traditional lending institutions or cannot obtain acceptable financing from suppliers or vendors can benefit from Contract Financing. 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.
Who Can Benefit From Contract Financing
There are many types of businesses that can benefit from Contract Financing. These businesses often have large contracts that require an initial capital investment, but for which the companies do not receive a payment until a later date. Contract Financing can help smooth the liquidity challenges this scenario creates for the business and allow them the ability to accept and complete the contract.
Some common types of businesses that could benefit from Contract Financing include:
Government contractors are prime users of Contract Finance. They often have large projects where they need to purchase materials, hire subcontractors and begin a project long before they receive substantial payments from the contract. Contract Financing can help government contractors maintain liquidity at the front end of the project by providing the capital necessary to invest in materials, subcontractors and other necessary elements to move the project forward. The Contract Financing lender will work with the government contractor to provide capital where the government contracting entity’s disbursement schedule for the project does not meet the project’s actual capital demands.
Companies that plan and produce large events can also benefit from Contract Financing. These businesses often need to hire staff, pay deposits and make other arrangements in advance of receiving payments from their clients. Contract Financing can play a key role in addressing an event planners cash flow needs. By providing liquidity when the initial contract is signed, Contract Financing can provide event planners the resources they need to make their event a success.
Professional Services or Products
There are many other types of businesses that can benefit from Contract Financing. Any business that is providing a service or is delivering finish goods and has a signed contract may be able to obtain Contract Financing. By easing the cash flow demands of a large project or order, Contract Financing can allow a professional service company or the producer/seller of a product to take on a new project or order it might otherwise have to turn down. Whether cash flow demands come from an expectedly large order/project from a current customer or an order/project from an entirely new client, Contract Financing provides the upfront capital a company needs to manage its liquidity. This allows the company to serve its customers better or to grow its business and eases the capital constraints that can limit a company’s business expansion.
Is Contract Financing Right for Your Company?
There are many small and midsize companies that can benefit from Contract Financing. Understanding when your company should utilize this unique liquidity and financing tool can make a significant difference in the growth, profitability and long-term value of your company.
There are several key questions a business owner can ask to determine if Contract Financing might be right for their company. These include:
- Do you have a signed/guaranteed contract from a known and reliable customer?
- Are you experienced in your field and do you have a successful track record of delivering for your customers?
- Does your new contract require significant capital up front and place liquidity demands on your company?
- Is there a defined period by when you need to finish the project or deliver the goods and when the contract will be paid?
- Is the contract profitable with margins in excess of 20%?
These are just a few of the factors to consider when assessing whether or not Contract Financing is right for your company. Abington Emerson Capital can help you determine whether or not Contract Financing is an appropriate tool to meet your liquidity needs.