Contract finance

If you have a signed contract for a large order but don’t have the finance to purchase the supplies or finance the resources to execute 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 (if you win the tender), they will issue you with a letter of intent that you can include in your tender submission.  However, be aware that not all contract financiers will issue letters of intent.

Types of contract finance

Lenders have a wide range of contract finance products available.  Read through the list below to see which option suits you best.  In all of these options, the lender gives you access to funds that you wouldn’t otherwise have in order to fulfil the contract.  But in option 1 and 2, you don’t have direct access to the money.
One example of a transaction-specific type of contract finance is a product called Purchase Order or Project Finance.  It is a short-term loan or advance, secured by the official purchase order or contract, to pay for inputs, raw materials, packaging, finished/trade goods for resale, etc. needed to produce and ship a product or deliver a service.  The money must only be used on agreed upon items required for the completion of the contract.

Option 1: They control the contract

In this option, lenders have systems in place where they put one of their own project managers in your business to take over the entire contract. This option most often happens if the work required to complete the contract is not going well. In this case, you cede complete control to the lender. The lender will have full control over the contract including control of finances, payroll, etc.  In the event that the lender is forced to take control of the project, the cost associated with deploying their staff to complete your contract will be for your account.

Option 2: They control the finances

In this instance the lender controls the finance but you run with the work required to complete the contract.

Option 3: You control the contract and the money 

In this option, you will have control over the finances and the contract.  Once the contract financier is satisfied that you have the skills and expertise to complete the contract, they approve the loan and pay the money into your account.  The loan is only for the duration of the contract, so make sure there are no late deliveries!
If you are a small business and battling to raise finance through formal lenders such as banks, you should approach SEFA.  This is a Government sponsored agency that also offers contract finance to small businesses that cannot find finance elsewhere.  The National Empowerment Fund (NEF) also offers procurement finance specifically aimed at assisting previously disadvantaged business owners to complete large contracts.

The cost of contract finance

Contract finance is linked to the prime rate—although usually it is a few percentage points higher. 
Other costs to consider are: 
  • A lawyer's fees to set up the cession documents (in this case, you will be ceding the contract to the lender)
  • Any transaction costs or management fees, in the event that the lender manages the finances

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