As a company owner or manager, you need to put your best foot forward when securing contracts. One of the ways to achieve this is by proving that you can fund a particular project. This requirement may be a tall order, especially when dealing with capital-intensive projects. To circumvent financial contractors, you should consider contract financing. Here is what you need to know about contract financing.
What is Contract Financing?
Contract finance is a form of funding whereby lenders offer advanced cash flow to cater to a particular project’s future billing. Unlike bank loans, contract financing mainly uses signed agreements between customers and companies as collateral. In this case, the lender scrutinizes the customer’s creditworthiness instead of yours.
Notably, the finance company requires a detailed contract of the project to determine its viability. After scrutinizing the details, the finance company will grant you an advance to commence the project.
Types of Contract Financing
Contract finance can be classified into three types, namely;
1. Company-monitored Financing
In this form of funding, the lender allows you to access a percentage of the fund once you have completed a particular milestone. Company-monitored finance is often used by medium and small finance companies that are cautious of releasing the entire amount.
2. Purchase Order Finance
With purchase order finance, the lender takes up funding for materials and labor used in the project. This implies that you have no control over the money since the finance company deals directly with the suppliers and employees.
3. Full amount Finance
Some finance companies may agree to disburse the project’s full amount to your company’s bank account. You will, thus, be expected to repay the money after the completion of the project. However, you must have a good credit record to enjoy this form of contract finance.
As an entrepreneur, you must familiarize yourself with business models that work best with contract financing. Key industries include construction and IT businesses. Feel free to secure funding from Navigate Firm.