Contract financing is one method where your business can secure a cash advance on work that your employees are yet to perform. This type of loan will have collateral that is based on a contract between your customer and your company. You will notice several differences between this and a traditional loan, such as the fact that these loans are underwritten based on the credit of your customer and not your company. Additionally, this loan contract will often specify various milestones based on the steps needed to complete the project.
The Setup of a Contract Financing Loan
The beauty of contract financing is that it will advance the majority of an invoiced amount right away. Usually, the remainder will be paid to you (minus a fee) when the invoice is completely paid. Let’s say that you have a company that constructs warehouses, and a customer hires you to build one at a charge of $600,000. You may sign a contract that specifies four milestones at $150,000 each. In this case, you would hire a finance company to evaluate the contract, the track record of your business, and the credit of your customer. If they approve the contract, they will do the project invoicing. In this case, the finance company will usually advance about $135,000, or 90%, of each invoice. Once the fee of the finance company is paid (normally 2%). In this case, the finance fee would be $2,700, and after your customer pays the invoice amount to the finance company representing you, your company will receive the remaining $12,300.
When Would Contract Financing Be Useful?
Contract financing would be useful when the company in question has a scant or poor credit history. IN this case, it can block access to the normal conventional bank loans and commercial lines of credit. However, you can rest assured that a contract will approve your financing arrangement as long as your company has characteristics such as a customer with a good credit rating, a signed contract that has a clear schedule of payments and milestones, and enough of a track record to perform the work on time.
Qualifying For Contract Financing
If you are curious how your business can qualify for Contract Financing, please be aware that it is based on several factors, including the time you have been in business, your monthly billing statement, and the credit rating of your customer. Additionally, there are plenty of firms that will help you qualify for this arrangement. Just do an internet search!