Contract Financing: What It Is and How to Find a Lender
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Contract financing gives small business owners advance payments on work they have yet to perform. A contract finance loan provides some or all of the payment businesses would otherwise wait weeks or even months to receive. Because it is backed by a contract, a contract financing loan is underwritten on the terms of the contract and the creditworthiness of your client, rather than on you or your company’s credit record.
- How contract financing works
- Qualifying for a contract finance loan
- How to find contract financing lenders
- Alternatives to contract financing
How contract financing works
Online lenders, private firms and certain banks offering contract financing advances are able to fund most of an invoiced amount right away. The remainder — minus a fee — is paid to you when your customer pays the invoice.
Business attorney Leslie Tayne says this kind of financing can be especially useful if you’re taking on a high-cost project, like the construction of a high-rise building. It can help you pay upfront deposits that fabricators will require for custom equipment, furniture or fixtures.
Qualifying for a contract finance loan
A contract finance loan may be easier to qualify for than a traditional small business loan since approval has more to do with your customer’s creditworthiness than your own, but your business’s past performance may be considered as well. In addition to the contract you wish to finance, your lender will likely review the following from your business:
- Bank statements (past six months)
- Tax returns
- Profit and loss statement
- Balance sheet
- Receivables aging report
How to find contract financing lenders
While some banks offer contract financing products, you’ll likely need to go through a private firm. Ask for recommendations from other professionals in your field. If you prefer face-to-face communication with your lender, seek out a firm in your area. Here are three lenders recommended by experts we talked to:
3 contract financing lenders
1. Coral Capital Solutions
Contract financing from Coral Capital Solutions is specifically available for low-risk contracts. Loans are available in all 50 states and Canada but only approved for businesses that have already performed the contracted service or that can demonstrate low operational risk. This includes, for example, companies that have long-term contracts and need to invest in hardware upfront.
2. King Trade Capital
King Trade Capital(KTC) offers financing for companies located in the U.S., Canada and the U.K. on government and non-government contracts for both domestic and overseas work. Financing is available for up to 100% of your inventory cost with loans ranging from $50,000 to $20,000,000. Funds from KTC can be available in under a week.
StreetShares offers instant prequalification and funding may be available in a few days after approval. You can borrow up to 90% of your invoice amount for a maximum loan of $250,000.
There’s no application fee or prepayment penalty and interest rates start at 1.00% for a 30-day advance. StreetShares also promises to beat or match any competitor’s offer or give you a $100 Amazon gift card. Its products may not be available in South Dakota, North Dakota, Rhode Island, Nevada and Montana.
Alternatives to contract financing
If you’re looking for an alternative to contract financing but still want an advance on your invoice, another option is to sell your accounts receivable. Invoice factoring involves selling invoices to a third party, or “factor,” in return for a discounted advance on the receivable payment. Here’s where you can find the your best invoice factoring companies.
Purchase order financing
Purchase order financing, also known as PO or PO lending, can also help you cover upfront cash flow needs, but differs from contract financing in several key ways. PO lending involves the lender issuing a letter of credit or a bank draft to your supplier for the entire purchase amount. The supplier delivers the goods to you directly and you repay the lender, minus a fee.
Purchase order lenders may require a profit margin of 20% or more and charge higher interest rates than traditional small business lenders.
Another option is to work directly with your supplier. Supplier financing involves a vendor lending some or all of the payment for goods or services to a customer, with interest, to be paid back over a set period. This arrangement may be a viable option when banks or other lenders have declined to finance the transaction.
Business line of credit
If your business credit is in good standing, you could consider applying for a business line of credit. Unlike a loan, a line of credit gives a business a source of funding it can draw on up to a set limit, pay back and draw from over and over again during the draw period. Interest is charged only on what you draw. You can apply for a line of credit through a bank or an alternative lender. Here’s where you can find the your best lines of credit.