It is a reasonably straightforward process even for a startup to get funding against their accounts receivables. However, what financing options are available if you have just a signed contract or purchase order in hand and you need contract financing?
Key Points of Your Specific Situation and Review Your Contract Financing Options:
Do you offer a Product or Service?
This is probably the most critical question. A contract or purchase order is a nice piece of paper until you live up to it. How can both you and your funding source mitigate the risk of the invoice not getting paid by your creditworthy customer because of quality, quantity, or timeliness issues?
Does your Product Need Installed?
If the terms of your purchase order from your customer require installation from either you or another contractor, this adds another layer of complexity to your contract funding choices. Factors recommend having all your production and delivery steps laid out in a clear timeline so any lender can understand both your process and timeframe. Also, show the factoring company your product expertise and skillset.
Your Customer Type?
The creditworthiness of your B2B or B2G customer and their desire to help you and work with both you and your funding source is paramount. In addition, factors can offer your customer a Letter of Financial Capability to ease any fears they might have about your financial strength and how that might affect your ability to deliver on the contract or purchase order.
Do you Pre-Bill?
Contract Financing is transaction driven unless your balance sheet is strong enough for bank financing. For a factor to help fund your contract, the transaction must stand on its own merits. Your margins, your customer’s creditworthiness, and product needs must be attainable, and the contract has to be good for your business. Too low on margins or impossible demands make a contract unfinanceable.
Do You Bill Progressively?
Progress Billing is another variable that needs a discussion. Again our goal is your goal, a satisfied customer! Your customer (the account debtor) makes the rules, and it is difficult to ascertain their ultimate satisfaction until a job is at the completion stage. As mentioned above, please have all job steps mapped out completely. Also, make sure they match the contract’s language and your customer’s vendor agreements.