Contract Finance: The working capital you need to take on a contract

You will often be faced with the need to start work, staff up and perhaps even buy in new equipment to get the work done, but have to wait weeks or months until you receive a payment.

It can put a serious strain on your cashflow, and may even mean that you have to turn down a lucrative contract, because you cannot afford to fund it.

Contract Finance can help you ensure that contract working is not just possible, but profitable for your business.

What is Contract Finance?

Contract Finance is designed for companies that have been awarded a contract, but do not have the funds available from their own reserves to fulfil it. Contract Finance acts to advance funds against your future billing - in effect using the value of your contract as the security for a loan.

It means that when you need to pay your staff and suppliers, there’s no need to wait for your customers' payments first. So, you can take on ambitious new projects and be confident that your business will have the necessary cash flow. You can have the funds you need to deal with all your obligations, with no need for expensive funding from the bank or other providers.

How Contract Finance helps your business take on contracts - and grow

Your company may simply not have the cash reserves it needs to handle a large contract, particularly if it is still in its early stages. You will need to purchase supplies, pay for equipment and wages along with all other related expenses.

But you won’t be getting paid until you have made all these investments. Depending on the contract you have negotiated, you could be weeks into the project before you receive even an interim payment. A short contract could be complete before you receive the funds you need from your client.

It can put a chokehold on your business growth. You may have the skills and capacity to take on a profitable large contract only to have to walk away because you don’t have the necessary finance to start work.

Obviously, you can’t turn down lucrative contracts from clients you want for the long term. Contract Financing allows you to take on large orders, by ensuring you have the money you need. It can even help protect your business against unexpected late payments or project delays.

It also helps ensure that you can take on all the contracts you can handle, and grow your business fast.

How Contract Funding provides the cash you need

Contract Funding advances a proportion of the fee you have negotiated so your company can begin work on a particular contract.

With Contract Finance, the finance company will expect to see a detailed contract from a reputable end customer. They will want to ensure that your buyer will really be able to pay for the work once the contract has been completed.

This means that it is the credit rating of your end customer, rather than that of your own business, which will be central to securing the finance you need. Working for a large organisation, such as a major developer, a local authority or a central government organisation, might all be ideal.

The finance provider will then make a cash advance to your business, which will allow you to buy in supplies, equipment and staff to start work and deal with other costs. The level of funding advanced may depend upon your business sector, the value of the contract and the terms you have negotiated.  

This advance is unlikely to be for the entire value of the contract, although some providers may provide a high percentage of the total value, particularly if you have multiple contracts that you are funding.

Contract Funding is considered riskier than Purchase Order or Production Finance as the client may need to fulfil the entire contract to be paid. Costs are therefore a little higher to reflect the additional risk.

How it works

Once your facility has been approved, accessing your money is straightforward:

1. Submit your contractual billing to your provider
2. They will release an agreed percentage of the value to you minus their fee
3. Once your customer makes a payment, the provider will release the remainder to you

Is Contract Finance right for your business?

Many businesses in the construction, IT and services sectors can use Contract Finance to fund their contract work. You need to:

• Supply goods or services under contract. These contracts should be to a set time and price
• Have an annual sales turnover of above £250,000
• Work with reputable clients, who offer a good credit risk

Financial solutions from Rangewell

Contract Finance providers vary in the terms and costs of the finance they offer. Your business needs expert help to find the most competitive provider for your sector, your turnover and your ambitions.

At Rangewell, we can use our expertise to support your business – and ensure that you have the financial solutions you need. We can find providers who can deliver contract finance solutions that recognise the challenges you face and are tailored to your sector - reducing your costs, and increasing the levels of funding that you can call on.