Contract financing is a form of assurance that significantly increases the chances that you secure a contract that you’ve been awarded by a consumer (usually a company). You may initially think “why would I need assurance if I’ve already been promised the contract?” Fact is, many contracts are lost due to the service provider’s inability to meet deadlines or requirements – particularly, proof of the necessary funds to see the project through. To hedge against this, it is possible – if not outright advisable – to secure a letter from a lender to the client of your ability to fund the project in full.

Finalizing the Funding Transfer and Beginning the Project

You can opt for a purchase order finance, in which the financial institution provides the funds with which you can then purchase materials and pay workers. In this case, the lender sends the funds directly to the supplier on your behalf. You will need a top-notch credit score, in most cases, to secure this type of contract funding – despite the fact that, in order to minimize the risk, your business does not actually control the funds.

Obtaining Partial Control of Funds for Your Business

In this scenario, you have full control over the contract financing; this is often a multi-step process. For example, as you meet preset milestones, more money will be released by the lending institution. If a project requires a total of $5 million in projected funds; then perhaps the lending company will provide you with $500,000 after the foundation is laid for a property extension or new office building. This tactic is usually indicative of smaller financing institutions, for obvious reasons.

Getting Total Control of Funds

The final and most robust situation for your company; in this one, all funds are released to you at the start of the project if they are approved. It can take the form of an overdraft or a direct business loan; in the latter, full payment back to the company is due at the conclusion of the project. Your credit must be virtually blameless to secure this option of contract financing.