If you have a signed contract for a large order, but don’t have the finance to purchase the supplies or finance for the resources to complete the work, then contract finance is a good option.
You can also consider this option if you are tendering for a large contract. In this case, you would approach the contract financier and if they agree to finance you, should you win the tender, they will issue you with a letter of intent that you can include in your tender submission.
What is contract financing?
Contract financing can give you the money to expand your business beyond its normal operating capacity so that you can fulfil the sales contract.
The type of contract finance you receive can vary widely and will also depend on the urgency of the finance. If you needed the finance “yesterday” then your options for finance may be more limited. In some cases, you may need an investor for your business, or you could look at sharing the contract with another business.
What are your options?
The options to raise contract finance are very similar to those for working capital. The amount of finance required will play a large role in deciding which option best suits your business.
For larger amounts:
- Contract finance (e.g. purchase order financing).
- Government lending agencies and niche small business lenders.
- Equity Finance (lender buys shares in your company).
For smaller amounts:
- Term loans (lender gives you money for a fixed period and charges you interest).
- Personal or business overdrafts.
- Personal or business credit cards.
- Customer deposits (customer pays a % of the total contract value upfront).
- Equity finance (lender buys shares in your company).
- Debtor finance (borrowing against an invoice).
- Supplier finance (lender gives you the supplies on credit for a fixed period).
- Government lending agencies.
This article first appeared on Finfind.co.za, it is republished here with permission.