Contract Financing

How Lenders Evaluate a Contract Deal

• Customer credit. Large businesses and government agencies carry the most weight. A small or slow-paying customer may limit how much you can borrow.

• Contract terms. Lenders read the payment terms, acceptance criteria, cancellation rights, change order process and any clause that restricts assignment.

• Your track record. Evidence that you have delivered similar work on time reduces performance risk.

• Margin. The job needs enough gross profit to cover financing costs and still leave you a return.

• Supplier reliability. For product deals, the lender may vet the supplier and confirm pricing, lead times and quality controls.

• Existing debt. Liens already filed against your receivables can block or complicate a new lender's position.

Expect to provide the contract or purchase order, supplier quotes, an accounts receivable aging report, recent financial statements and tax returns. Contractors are often asked for a work-in-progress schedule as well.

Matching Financing to Each Stage of a Job

Different tools fit different points in the life of a contract. Many businesses combine two or three of them on a single job.

1. Award and start-up. Mobilization funding or a contract line of credit covers bonds, insurance, permits and the first payroll cycles.

2. Procurement. Purchase order financing, vendor terms or payables programs pay for materials and finished goods.

3. Performance. A revolving line or progress payments from the customer fund ongoing labor and overhead.

4. Billing. Factoring or a receivables line turns approved invoices into cash and often pays off earlier advances.

5. Closeout. Some specialty lenders advance against retainage still held until final acceptance.

What This Financing Costs

Pricing depends on the lender type, the risk and how long the money is out. Banks and SBA lenders usually charge interest on the amount drawn, plus closing costs. Specialty and non-bank lenders often charge a fee for each 30-day period or part of a period, along with due diligence, wire and monitoring fees. Speed and flexibility usually cost more.

The useful test is total dollar cost against gross profit on the job. In a hypothetical deal that produces $150,000 of gross profit, financing that costs $15,000 in all consumes 10 percent of the profit. That may be a sensible trade if the alternative is passing on the contract. Ask each lender for a complete fee schedule and a sample settlement so you can compare offers on the same basis.

Frequently Asked Questions

Is contract financing a loan?
Sometimes. Lines of credit and SBA-backed facilities are loans. Factoring and some purchase order arrangements are structured as purchases of receivables or payment of supplier costs, but the lender still expects to be repaid from the contract proceeds.

Can a new business qualify?
It can be easier than with a conventional loan, because the customer's credit and the contract matter so much. Lenders still want proof that you can perform the work.

Does my customer find out?
Usually yes. Most structures require the customer to confirm the order or send payment to a lender-controlled account. Government contracts that use the Assignment of Claims Act require formal notice to the agency.

What if the customer disputes the work?
A dispute can delay or reduce payment, and the agreement will spell out what you owe the lender in that case. Read the recourse terms closely before signing.

Explore Financing for Your Next Contract

The right structure depends on what you sell, who your customer is and where the cash gap sits in your job cycle. Map out when costs hit and when payments arrive, then compare a few options against the profit the contract will produce. The guides in this section cover each approach in more detail.

Related guides:

• Purchase Order Financing

• Purchase Order Financing Companies

• Government Contract Financing

• Construction Contract Financing

• Accounts Payable Financing

• Vendor and Supplier Financing

• Mobilization Funding

Contract financing gives a business the cash to perform on a signed contract or purchase order before the customer pays for the finished work. Instead of leaning only on your balance sheet, the lender looks closely at the contract itself, the customer behind it and your ability to deliver.

Companies that win large orders often hit the same wall. Suppliers, crews and equipment need to be paid weeks or months before the first invoice comes due. This guide explains how funding tied to contracts works, the main types, how lenders size up a deal, what it costs and how to match a structure to each stage of a job.

Why Contract-Based Businesses Run Short of Cash

Most contracts pay on delivery, acceptance or a monthly billing cycle, and the invoice then sits on payment terms of 30, 60 or more days. Costs, on the other hand, start the day the work starts. Materials must be ordered, staff must be paid every pay period and equipment must be on site.

Growth makes the gap wider. A company that doubles its contract volume usually needs roughly double the working capital to carry it, even if every customer pays on time.

Here is a simple hypothetical. A company wins a $500,000 order. Materials and labor cost $350,000, paid out over the first 60 days. The customer pays 45 days after delivery. The company has to carry up to $350,000 of costs for three to four months before a dollar comes back. Without outside funding, it may have to turn the order down.

How Financing Against a Contract Works

The basic idea is that the contract becomes the main source of repayment. The lender reviews the agreement, confirms the customer is creditworthy and checks that you can actually do the work. It then advances money for specific costs, sometimes paying suppliers directly or releasing funds at set milestones.

When the customer pays, the money usually flows to an account the lender controls, or the payment rights are formally assigned to the lender. The lender takes what it is owed and sends the rest to you. Most lenders also file a UCC-1 financing statement to record their security interest in the contract proceeds and related assets.

Two risks drive every decision. Performance risk is the chance you fail to deliver, so the customer never owes the money. Payment risk is the chance the customer cannot or will not pay. A deal with a strong customer and a proven operator scores well on both.

Main Types of Financing Tied to Contracts

• Purchase order financing pays your supplier for finished goods that you resell to a creditworthy business or government customer. It suits distributors, wholesalers and importers more than manufacturers.

• Contract receivables financing advances cash against invoices once the work is billed, either through factoring or an accounts receivable line of credit.

• Mobilization funding covers start-up costs on construction and some service contracts, such as bonds, insurance, equipment transport and site setup, before the first progress payment arrives.

• Accounts payable financing lets a third party pay your suppliers now while you repay later, stretching your own payment cycle.

• Vendor and supplier financing comes from the seller side, such as extended trade terms, installment plans or programs that help suppliers get paid early.

• Contract lines of credit are revolving or project-based lines sized to one or more contracts. The SBA Contract CAPLine, part of the SBA 7(a) program, finances the costs of specific contracts, including allocable overhead. 7(a) loans are capped at $5 million.

Government and Construction Work Follow Special Rules

Federal contracts come with their own payment and assignment rules. The Assignment of Claims Act allows a contractor to assign payments under a federal contract to a bank or other financing institution, provided the contract does not prohibit it and written notice goes to the contracting officer, the disbursing officer and any surety. The Prompt Payment Act generally requires federal agencies to pay a proper invoice within 30 days of receipt, or by the date in the contract, and to pay interest when they pay late. Agencies may also provide their own financing, such as progress payments.

Construction contracts add progress billing, retainage, surety bonds and lien rights. A lender will want to understand who holds back what, when it is released and whether a payment bond or lien rights protect the receivable. The SBA Surety Bond Guarantee program helps small contractors obtain bid, payment and performance bonds that they might not get on their own.