Balancing financial agility and flexibility is crucial in today’s business landscape. Businesses, especially those handling contracts, constantly seek innovative financing solutions that optimize cash flow and operational stability. Some companies now offer financing options specifically tailored for businesses engaged in contract work. Let’s explore the potential benefits of contract financing for business owners and some options offered by companies like Resolve.
This blog aims to empower you with a comprehensive overview of contract financing, its types, and how to make informed decisions about your financing options, helping business owners make the most of their companies.
Contract financing offers businesses immediate funding based on expected contract revenue, enhancing cash flow management. Like invoice factoring, contract financing is particularly useful in industries like construction, manufacturing, or IT, where payment terms are lengthy. It provides an advance on a contract's value before project completion.
This method functions like a short-term loan, allowing businesses to start new projects without waiting for previous ones to pay out, maintaining steady operations. Various types of contract financing ensure businesses have immediate access to capital for essential expenses, mitigating the impact of delayed payments.
Contract financing lenders offer funds to businesses in exchange for their contracts. They focus on the contract's value and the client's creditworthiness rather than the business's credit history or collateral. Similar to other term loans, lenders analyze business concerns and the value of accounts receivable before establishing a relationship and extending contract financing payment terms.
Contract financing companies also assess factors like repayment terms and the client’s financial capability and stability before advancing a portion of the contract's value. These factors make reliable clients, like government contracts, more valuable in the eyes of contract financing payment companies. Known for their flexibility and quick funding, these lenders understand various industries and contract specifics, making them suitable for businesses ineligible for traditional business loans or needing rapid financing.
Their expertise and adaptability make them crucial for companies seeking to improve cash flow and seize new opportunities efficiently, bypassing the delays and rigidity of conventional banks and credit unions.
Contract finance companies work by advancing funds to businesses based on the expected revenue from their contracts. Here’s a step-by-step breakdown of the process:
Application and Assessment: The business approaches a contract finance company with its contract prices and details, and the company evaluates the contract’s value, the client's creditworthiness, and the likelihood of repayment.
Approval and Advance: If the contract meets the finance company's criteria, the business receives an advance that typically varies between 70% to 90% of the contract’s value.
Utilization of Funds: The business uses the funds for operational costs, paying suppliers, or investing in resources needed to fulfill the contract. This immediate liquidity helps in maintaining a healthy cash flow.
Contract Financing Payment: Upon contract completion, the client pays the contract finance company directly according to the contract terms, such as net 30 or net 60 days.
Settlement: When the client pays, the contract finance company deducts its share and releases any remaining balance to the business.
While this process offers businesses a straightforward way to convert their contracts into immediate working capital, the documentation requirements differ from traditional lenders. Working with a comprehensive partner like Resolve, which helps streamline your financial processes, drastically increases your chances of approval.
The various forms of contract financing cater to the diverse needs of businesses across many industries. Each form of contract financing is designed to address specific situations and challenges that companies might face in their operations:
Purchase order (PO) financing is a type of contract financing specifically targeting businesses needing funds to fulfill customer orders. This method is ideal for companies that receive large orders but need more capital to produce or supply the goods.
In PO financing, the finance company pays the supplier directly to produce and deliver the goods to the customer. Once the customer receives and pays for the order, the business pays back the finance company, along with any fees and interest. This type of financing is particularly beneficial for wholesalers, distributors, and manufacturers who often deal with large purchase orders but face cash flow constraints.
Borrower-controlled contract financing allows businesses to exercise more control over the financing process. In this arrangement, the company receives the funds directly and manages their use.
This method allows businesses to allocate funds flexibly for materials, labor, or other operational expenses. The responsibility for paying the financing company back rests solely on the industry, usually after receiving payment from the client. Businesses that prefer autonomy in managing their funds enjoy the financial flexibility offered by Resolve's Net Terms, which offer more affordable financial options for business accounts receivable.
In lender-controlled contract financing, the finance company plays a more active role in managing the funds. Instead of providing a lump sum directly to the business, the finance company may pay suppliers or subcontractors directly or release performance-based payments derived from project milestones.
Unlike lines of credit, this approach safeguards the finance company’s assets by ensuring the funds are used only for their intended purpose. It's an effective solution for businesses that may not have an established credit history or those in high-risk industries. Lender-controlled financing often requires more oversight and interaction between the business and the finance company. Resolve's financial management tools can help companies considering this option better establish their financial reporting and increase their chances of approval.
Businesses must meet specific criteria set by contract finance companies to secure funding. Some key factors include:
Type of Contract: Finance companies prefer contracts with clear, enforceable terms from creditworthy clients with a strong repayment track record, such as government contracts.
Credit Rating: Finance companies often conduct a credit check on the client to assess the risk of late payments outside of reasonable time frames or non-payment entirely, and prefer monthly billing for maximum assurance in their loan programs.
Cash Flow Consistency: Contract finance companies look for businesses with a steady invoicing flow, indicating regular work and income. An established method of payment gives any financial institution greater peace of mind when extending contract financing methods to a business.
Business Financial Health: The business's financial health is assessed using its cash flow, profitability, and debt-to-income ratio. Business concerns can negatively impact the rates offered by the contract finance company.
Industry-Specific Requirements: Depending on the industry, additional qualifications may be required. For example, the ability to place a mechanic's lien on the property can be a factor in construction.
Documentation and Compliance: Lenders require adequate record-keeping, legal compliance, and transparency in operations, including the contract, business financial statements, and client invoices.
Meeting these criteria doesn't guarantee approval, and companies seeking flexible financing options should explore Resolve's offering for lower fees and better terms compared to contract financing.
Securing contract financing involves several steps, and while each finance company may have its unique process, the following outlines a general approach to obtaining contract financing.
Customer Contract: Securing a contract with a customer serves as the basis for the financing, outlining the scope of work, contract financing payment terms, and other critical details.
Qualifying Information: Businesses must compile and present information demonstrating their eligibility, including details about the business, the contract, and the customer's creditworthiness.
Milestone Invoices: Once approved, the business submits invoices tied to specific milestones within the contract, triggering contract financing payments to the client from the company.
Receive Invoice Payment: Similar to invoice factoring, the financing company advances a portion of the invoice value to the business, helping the business cover immediate operational costs and continued work on the project.
Contract Financing Payment: The customer pays the invoice directly to the financing company within the appropriate number of business days according to the agreed invoice payment terms, minus fees and costs.
Receive Invoice Share: After the financing company receives the customer's invoice payment, it releases the remaining balance to the business minus any fees and interest.
It's essential to evaluate all available financial options for your business. While contract financing presents a viable route for many companies, there are other solutions. Resolve offers a comprehensive alternative with distinct advantages specifically catered to companies involved in contract work.
Resolve offers a streamlined, efficient approach to financing that directly addresses some of the traditional challenges associated with contract financing:
Flexibility and Speed: Unlike traditional contract financing, Resolve offers swift, upfront payment for invoices, ensuring businesses have immediate access to the funds they need to thrive.
Simplified Process: Resolve simplifies the entire financing process with an easy application, quick approval, and immediate payment upon invoice submission, helping businesses avoid the rigorous credit checks and complex documentation requirements of contract financing.
Risk Management: Resolve’s discreet credit checks help businesses make informed decisions about offering net terms to customers. This proactive approach to risk management reduces the potential for non-payment or delayed payments that can come with contract financing and allows businesses to confidently offer net 30 or net 60 terms to their customers knowing they will receive 100% cash advances on invoices.
Cost-Effectiveness: Traditional contract financing's sometimes opaque and variable cost structures can accumulate fees, affecting the overall profitability of the financed contracts. Resolve's financing solutions are designed to be cost-effective, offering competitive rates and transparent fees.
If you'd like to know more about Resolve's safe and powerful financial options, get in touch. There are many financial possibilities at your disposal that will help your business improve its cash flow, grow, and establish a stronger relationship with its customers.
|
Aspect |
Resolve |
Traditional Contract Financing |
|
Speed of Funding |
Immediate payment for invoices |
Payment follows customer payment schedules |
|
Process Complexity |
Streamlined and simplified |
Often complex and time-consuming |
|
Risk Management |
Proactive credit checks and advice |
Primarily reactive and dependent on the client's credit |
|
Cost Transparency |
Clear, upfront costs |
Variable fees and interest rates |