What is contract financing?

A contractor’s business depends on contracted jobs—often for one job or a series of jobs—for entities like large companies or the government.¹

Although these businesses can be lucrative and successful, it can often be difficult for contractors to secure funding for things like equipment needed to complete the contracted work because most banks will not lend to them.¹ So how can contractors secure the funding they need? 

Contract financing, or contractor mobilization lending, allows contractors to secure financing based on how much contracted work is worth instead of profits like traditional lending.¹

How does contract financing work?

Contract financing is short-term financing available to those who have won a contract and will complete work once the funding they need is available (contract financing is typically 20–30% of the contract).^1,2 Often, lenders will require contractors to provide proof that they can complete the work successfully before the loan is given, or “proof of funds” to cover the loan in case the contracted work falls through.^1,2

Who is considered a contractor?

Sometimes, people believe contractor refers only to a general contractor or subcontractor in a construction environment, but in reality, a contractor is any company or person who vies for contracted work from a larger entity.¹

When to use contract financing

Contract financing is ideal for businesses that need to complete bigger projects to scale and grow, especially for those who do not have assets that would traditionally be used to secure funding. In this case, the contracted work serves as the collateral necessary to be approved for the funding.¹

For example, if a job requires you to front $100,000 to complete the work but you do not have it in liquid assets, you might be able to secure some of that in contractor financing once you show the lender you will earn that (and more) when you complete the work.³

Types of contract financing

In general, there are three types of contract financing: borrower-controlled, lender-controlled and purchase order.

Borrower-controlled

In a borrow-controlled situation, the borrower is in full control of the contract and the funds and uses them at their discretion with the lender often monitoring its use.¹

Lender-controlled

Lender-controlled means the lender dictates how and when money moves in and out of accounts, per the contract’s terms.¹ When the contract is completed, the lender transfers the funds to the account and closes it.

Purchase order

Purchase order financing is mostly used for purchasing specific materials.² Instead of providing funds to the borrower directly, the lender may give the funds directly to a supplier for goods and services, which helps mitigate risk for all parties.¹

Does my business qualify for contract financing?

Before securing contract financing, you will need to qualify. Although all loans are slightly different, there are often similarities in what you will need to provide to the lender:

• Length of time in business: Usually, the longer a business has been around and profitable, the more likely a lender will be to provide financing. Lenders also typically have a minimum threshold before they will let a company borrow, so it's important to secure a strong base of customers and profit before asking for large sums.⁴
• Monthly billing amount: Lenders will often want to know how much business—or how many customers you “bill”—each month. If you are not billing your customers enough to cover the loan, there’s a chance you might not qualify.⁴
• Proof of contract: Simply, the lender will want to know how much the contract is worth, and how much you get for finishing the project or for completing certain milestones during the lifecycle of the project.⁴ Generally, contracted work comes with milestones and billable amounts for those milestones, so having those outlined provides extra security to the lender that you will receive funds along the way.⁴

What if I can’t get contract financing?

If you don’t think you can secure contract financing or do not qualify for it, there are other options like small business grants or crowdfunding. Learn more about these options and all the ways Nationwide supports your success by checking out our business solutions.

[1] “What Is Contractor Financing?” Olivia Chen, nerdwallet.com/article/small-business/contractor-financing (Accessed February 2024)
[2] “What Is Contract Financing and How Does it Work?” Banks Editorial Team, banks.com/articles/loans/business-loans/contract-financing/ (Accessed February 2024)
[3] “Contract Financing: How You Can Use It to Finance Your Business” excelcapmanagement.com/contract-financing/ (Accessed February 2024)
[4] “5 Steps for Securing Contract Financing” Jennifer Post, fool.com/the-ascent/small-business/articles/contract-financing/ (Accessed February 2024)