Contract funding is for companies that have been awarded a contract, however, do not have the funds to fulfill the contract. Lenders that provide contract funding will typically advance a portion of the contract so the company can successfully begin and complete the project.
Contract finance is different from purchase order or production finance in that some of the funds may be used for getting the project started or for "mobilization". Some lenders will only advance mobilization funds if the contract between the client and the customer specifically provides for mobilization billing. One example of mobilization funding is when a government contractor is awarded a contract for overseas work, however, before the main contract work begins the company receives funding to set up an operating base overseas to manage the project and train employees.
Contract funding is considered riskier than purchase order or production finance as the client must fulfill the entire contract in order to get paid. If the client fails to fulfill the contract and has no other projects going at the same time, the lender will need to seek repayment by other means.
Contract finance can take on various forms including loans against sports and entertainment contracts or funding for government contractors that have been awarded a bid. Lenders will underwrite the applicant's abilities to fulfill the terms of the contract so they may receive repayment. Lenders will also look at the creditworthiness of the personal guarantors, typically any owner with more than 20% ownership, as they will be ultimately responsible for repayment of the contract funding.
Contract finance is expensive and should be used for growth opportunities. Companies that are looking for contract finance in order to take on multiple contracts are good candidates. Lenders prefer to work with companies with multiple contracts as there are additional means of repayment.
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