Taking on a major contract may require both a contract guarantee and working capital financing. A contract guarantee meets the customer's security requirements, but it does not provide your company with money to pay for materials, wages or subcontractors. That is why it is important to plan the guarantees and cash flow for the project together before committing to the contract.  

Why can even a profitable contract cause a cash shortage?

A profitable contract can cause a cash shortage if project costs must be paid before the customer pays the company's invoices.

At the beginning of a project, a company may need to pay for:

• Materials and supplies
• Subcontractors' invoices
• Subcontractors' invoices
• Machinery, equipment and tools
• Costs related to setting up the worksite

At the same time, the customer's first payment may not arrive for weeks or even months. The larger the contract is compared to the company's usual operations, the more working capital it generally requires.

What is the difference between a contract guarantee and working capital financing?

A contract guarantee is a security provided for the customer to ensure that the contractor fulfils its contractual obligations.

Working capital financing provides the company with funds to cover project costs before payments from the customer arrive.

A contract guarantee can therefore make it possible to sign the contract, while working capital financing may be needed to carry out the work. A company may need both solutions for the same project.

How do you calculate the financing needs of a major contract?

You can determine the project's financing needs by preparing a cash flow forecast. This shows when the project's income and expenses are expected to occur.

Your forecast should include:

• Initial project costs
• Monthly wages and other ongoing expenses
• Payment terms for materials and subcontracting
• The customer's payment instalments and their expected payment dates
• Possible delays
• The cash requirements of the company's other operations

The forecast helps you determine how much external financing is needed and for how long. It also helps you assess whether the company's own cash reserves are sufficient to cover possible delays.

Which type of financing is suitable for a major contract?

The right type of financing depends on the project's costs, payment schedule and financing period.

A credit facility may be suitable for changing and short term cash needs. The company can use the available credit when needed and repay it as payments from the customer arrive.

A business loan may be a suitable option if the project requires larger one off purchases or financing over a longer period.

Invoice financing can release funds for the company after an invoice has been sent to the customer. However, it may not solve the financing needs at the very beginning of the project if the first invoice has not yet been issued.

The repayment schedule should be aligned with the project's actual payment schedule.

How can you prevent a major contract from putting your other business activities at risk?

A single project should not tie up all of the company's available funds. You need to keep enough cash available to cover other projects, wages, taxes and unexpected expenses.

Your financing plan should also account for the possibility that the project may not go exactly as planned. Material deliveries may be delayed, the scope of work may change or the customer's payment process may take longer than expected.

Having sufficient cash reserves helps your company continue operating even if the project schedule changes.

When should you arrange financing for a contract?

You should assess your financing needs before signing the final contract. This allows you to determine whether your company can meet the security requirements and pay the project costs as planned.

Planning ahead also gives you more time to compare financing options and negotiate terms. You do not have to arrange financing in a hurry after the project has already started.

Konkretia Rahoitus helps you put together a financing solution that takes the contract guarantee, working capital and project payment schedule into account. This allows your company to assess the opportunities and risks of a new contract before committing to it.

Have you been offered a larger than usual contract? Contact us, and we will help you find out how to arrange the necessary guarantees and working capital in a controlled way.

Frequently asked questions about financing a major contract

Is a contract guarantee enough to get a project started?

Not necessarily. A contract guarantee meets the customer's security requirements, but it does not provide money for the company to use. Separate working capital financing may be needed to cover project costs.

Can a contract be profitable even if the company does not have enough cash to carry it out?

Yes. A cash shortage can arise if materials, wages and other expenses must be paid before the customer pays the company's invoices.

What information is needed to plan financing for a contract?

You will need at least the contract or a draft of it, a cost estimate, a payment schedule, the project timeline and information about the required guarantees.

When is inventory financing worth considering?   

You should assess your financing needs during contract negotiations. This allows you to make sure your company has sufficient guarantees and working capital to carry out the project before committing to it.