There is no doubt that financing is one of the biggest headaches for small business owners. It can take a lot of capital to fuel expansion, particularly if the business reaches an exponential growth phase. For service businesses facing such growing pains, contract financing can provide a wonderful resource to fund your expansion.
Contract financing works particularly well for businesses who win a particularly large contract while working capital resources are scarce. Often, companies faced with this situation will have trouble coming up with the funds to invest in completing the project. If the contract is for a service, then purchase order financing will not even be an option available to the business.
Contract financing, on the other hand, allows the expected revenues from a signed service contract to serve as collateral for a short term loan which can be used to fund the delivery of that service. The great thing about this form of financing is that the service does not need to be completed prior to receiving the funds. Additionally, these loans provide maximum flexibility because they are not dependent on the size of the company’s balance sheet or working capital balances. These loans literally can scale with expected contract revenues preventing your business from running out of cash due to unexpected growth.
If you are interested in contract financing, then it is important to make sure that you have a qualified lawyer review any contract that you expect to use to obtain financing. This is because certain clauses in a contract can deter a financing company from being willing to come in and provide a loan against the contract. You might also want to include some clauses that make a contract financing more appealing to financial institutions.
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In order to qualify for contract financing, the party seeking the loan must be the main contractor outlined in the agreement or a nominated sub-contractor. There also must not be any performance risk on the part of the firm obtaining the loan. A business also might need to be licensed with a local government agency or trade group to receive these loans in some countries. Some contract financing companies can finance up to 100% of the total contract value.
If your service business needs capital for expansion and it has significant contract-based revenue, then contract financing could be a great way of obtaining the extra funds you need.