Can Contract Financing Work for Your Small Business?
There are a few new lenders in the contract financing realm that are working with small businesses that have locked-in contracts with customers and need working capital. These lenders advance money on work contracts so that small businesses have funds for day-to-day operations before payments on the work contract kick in.
Typically, a small business will seek out contract financing when they enter into a contract larger than any previous engagements and need immediate capital in order to fulfill the contract while also managing other business obligations.
Unlike other forms of working capital financing, contract financing is specifically designed to aid small businesses that need an advance on their contracted work before a service is completed, but not necessarily before work on a product is complete.
Other types of working capital financing include:
Accounts receivable financing--asset-financing that allows a company to use its receivables as collateral in a financing agreement.
Purchase order financing--a short-term finance arrangement in which a lender provides capital to businesses that need funds to fulfill single or multiple customer purchase orders.
Production financing--a financing option for manufacturers who need capital to expand facilities in order to produce goods.
We've most recently seen an influx of lenders working with businesses on contract financing within the software industry. Software companies or software service providers that have already developed a product and are in a locked-in contract currently seem to be the best candidates for this type of financing.
If you think that contract financing may be a viable option for your business, have a lawyer review any new impending contracts before you sign them. There may be some small clauses that you can add to the contract to make you eligible and attractive for this type of financing down the line.
AMI KASSAR | Columnist | CEO, MultiFunding.com
Ami Kassar is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children.