Contract Financing is a unique type of funding tool that allows companies to create cash flow from a pending customer contract. This flexible financing tool allows companies, which receive a large order or may not be able to get a bank line of credit, to get the capital they need to complete the project. There are many types of companies that are able to use contract financing effectively. These include government contractors, event planners, professional service companies and seasonal businesses.
Contract Financing can be an important liquidity tool for new or rapidly growing companies that are unable to obtain traditional commercial financing. 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.
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.
Government contractors are prime users of contract financing loans. Government contractors often receive large projects where they need to purchase materials, hire subcontractors and begin a project long before they receive substantial payments from the contract. Government Contractors use Contract Financing to maintain liquidity at the front end of the project. Contract Financing provides the capital necessary to invest in materials, subcontractors and other necessary elements to move the project forward. A contract finance lender will work with the government contractor to provide capital during periods when the government contracting entity’s disbursement schedule for the project does not meet the project’s actual capital demands. This enables the government contractor to meet the liquidity demands of the project.
Companies that plan and produce large events can also benefit from contract financing, which play a key role in addressing an event planners cash flow needs. These businesses often need to hire staff, pay deposits and make other arrangements in advance of receiving payments from their clients. By providing liquidity when the initial contract is signed, Contract Financing offers event planners the resources they need to make their event a success. Many companies are finding that Contract Financing is an effective way to create cash flow.
A wide range of other types of businesses 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. This includes seasonal businesses that receive large holiday orders or other periodic spikes in business that can strain liquidity. 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 unexpectedly 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 ease the capital constraints that can limit a company’s business expansion.