Contract financing is an extremely popular method for businesses to acquire the funds they need to remain competitive. From major corporations down to SMEs, contract financing has become a very common way for companies of all sizes to finance their operations.
What is contract financing?
Did you know that small business owner are more likely to use alternative methods of capitalization than large businesses? These methods include things like factoring, invoice discounting, and line of credit financing, among others. If your business needs money right away but doesn’t have time or assets available as collateral then these alternative sources may be perfect for your business! To learn more about how contract financing can help your company check out our blog today!
Contract finance allows your company to get a cash advance on work that has yet to be completed on a job. A contract between your firm and your client serves as collateral. The contract outlines milestones and compensation based on how far you’ve progressed on the project. Contract financing varies from traditional loans in that it is underwritten based on the terms of the agreement and the credibility of your client, rather than your firm’s credit record.
Contractual finance usually advances up to 90% of an invoiced amount right away, with the remaining balance, excluding a charge, transferred to you after the payment has been received. Companies doing business by committing to deliver services or products for a certain project or event might use the contract as security to receive finance.
In most cases, the contract outlines the partial payments you’ll get when you invoice for the job you’ve accomplished. The agreement allows businesses to avoid possibly waiting for months for repayment on invoices they send straight to customers.
Requirements for contract financing in Kenya?
In order to qualify for a contract financing loan in Kenya, you need the following verified documents.
A completed application form A board-of directors resolution to open accounts certifying that they are authorized by all required shareholders and a certificate of incorporation/registration with your company’s current address on file at City Hall.
In addition, there is also an annual return or CR12 from the previous year which must be submitted along with utility bills dated within 30 days prior as verification in order to see if this would qualify under their lending criteria before approving any loan amounts offered through contract finance agreements – these vary depending upon whether loans will carry interest rates higher than 8%.
Benefits of Contract Financing For Businesses
A business may not have the necessary cash reserves to manage a significant contract, especially while it is still in its initial stages. You’ll buy materials, pay for machinery, and pay the labour, as well as all other associated expenses.
However, you will not be compensated until after you have made all of these deposits. You may be a fortnight into the job before receiving even an instalment, payment terms you’ve signed. It’s possible that a brief contract will be completed before you obtain the monies you require from your customer. It has the potential to stifle your company’s progress. You may have the talents and capacity to take on a lucrative major contract, but you must decline since you lack the requisite funds to begin work.
Obviously, you can’t refuse attractive contracts from clients you wish to work with within the long run. Contract financing enables you to accept large orders by ensuring that you have the funds you require. It can also help safeguard your company against late payments or project delays. It also ensures that you may take on as many contracts because you can handle and expand your company quickly.
Types of Contract Financing
There are three main types of contract financing in the world. They include:
Interim Payment and Commercial Advance
Once work is completed, the contractor is granted a commercial initial deposit. These are payments made as part of a contractual finance arrangement. Under the following conditions, corporate transaction process and business payment terms may also be formed:
- A commercial product or service is the contract item that is being funded.
- The cost of the contract is more than the simplified acquisition threshold.
- The contracting officer finds that making finance payments for the item is suitable or typical in the commercial sector.
- The government’s best interests are served by authorizing this type of contract financing.
- A sufficient level of security is attained.
- The total amount of commercial advance payments made prior to any work being performed under the contract should not exceed 15% of the contract price.
- The contract is awarded on the basis of competitive procedures or, if only one offer is solicited, adequate consideration is obtained (based on the time value of the additional financing to be provided)
- if the financing is expected to be substantially more advantageous to the offeror than the offeror’s normal method of custodianship.
Payments in advance
It’s possible that advance payments are common. Customary progress payments are those made in accordance with the general guidance, using the customary progress payment rate (80%), the cost base, and payment frequency established in the Progress Payments clause.
Payments based on performance
A new type of contract financing is being introduced that makes it possible to finance the acquisition of goods or services. Performance-based payments are not paid for accepted items, but they will be liquidated by deducting a percentage off from delivery payments before completion with no later than the final payment made at any point in time. The Contracting Officer needs only specify how much should have been deducted when determining total cost so there’s enough room left over during execution without having too many issues afterwards.
Things you should consider before getting a contract financing loan?
- Contract loans are loans obtained by one company from another company so as to enhance economic growth. Therefore these are some of the considerations for a company before it applies for a contract loan.
- Time spent in the workplace – The duration of time you’ve been in operation is among the qualifications for contract financing. Most creditors have a minimum term of at least six months, however this varies based on the institution as well as their credit limit.
- Ability to repay customers – Because your client should be the one to reimburse the financing firm once they’ve given your company contract cash, the lender will examine the customer’s credit record and assessment. Your credit profile would normally be a determining factor in a loan, though not in the instance of contractual finance.
- Amount of monthly billing – Your monthly billing amount is frequently required by contract finance lenders. This does not refer to the number of invoices you pay each month, but rather the number of consumers you bill each month.
- The lender needs to know that your billing amount is sufficient to cover the loan amount, even if you are not the one who is responsible for paying it back. Because the financing company is paid by your customers, you may not qualify if you don’t charge your customers enough to cover the loan amount.
- Favorable work history – You’ll also have to show documentation that you’re a legitimate contractor. We don’t just mean that you’ve been around for a while when we say that. It simply indicates that you have a track record of finishing assignments on schedule.
- This ensures that the lender isn’t giving over funds for a development that will be delayed, which will cause your invoicing process to be delayed, resulting in a delay in the funding firm receiving funds from your clients.
Frequently Asked Questions (FAQ)
How do you get a contract loan in Kenya?
If you have an employment contract, you can use it as collateral for a short-term loan with your lender. Mwananchi Credit LTD approval is usually quick, and easy to get. A definite order for your services or goods with a defined payment date will generally secure you a short-term loan to fund your work with a payment guarantee.
What are the risks and disadvantages of contracting out your business operations?
Accountability: As a contractor, your success or failure is determined through your own activities. It is really up to you to promote your own brand and find new contract opportunities. Only you can make your venture successful, and you are solely responsible if it fails. Hitting it alone may be an exhilarating endeavour for some, but it can also be stressful and alienating for others. Before users jump, think about which group they belong to.
Unpredictability: When your contract is up, you will have no assurance of future work as a contractor. If you’re certain that there will be enough demand for your abilities, that should not be an issue as long as you can live because of not understanding where you’ve been operating from monthly instalments.
Contract to contract: Contractors are only paid when they work, so you’ll need to budget for the period in between contracts when you won’t be being paid. You may find that you earn enough money while working to cover any downtime, and you may even look forward to it as an opportunity to further your education or take a well-deserved vacation.
What are the documents I need to provide when applying for this type of loan?
The documents required for contract financing are a completed application form, A board-of directors resolution to open accounts certifying that they are authorized by all required shareholders and a certificate of incorporation/registration with your company’s current address on file at City Hall. In addition, there is also an annual return or CR12 from last year which must be submitted along with utility bills dated within 30 days prior as verification in order to see if this would qualify under their lending criteria before approving any loan amounts offered through contract finance agreements – these vary depending upon whether loans will carry interest rates higher than 8%.
Which are the best contract financing solutions?
The terms and fees of contract finance vary depending on the supplier. Your company requires professional assistance in locating the most cost-effective provider for your industry, turnover, and goals.
We can utilize our knowledge at Mwananchi Credit Limited Company to discover credit choices to help your business – and guarantee that you have the financial solutions you require. We can identify contract financing providers who can give solutions that recognize your difficulties and are specific to your industry, lowering your expenses and boosting the amount of money available to you.
What are the contract financing payments?
Contract finance payments are funds disbursed by the state to a contractor before the government accepts supplies or services. They are based on contracts with a firm fixed price (FFP). Monetary compensation, payment terms, and achievement advancements are all examples of public procurement finance payment disposition techniques.
Contract financing can be a great way to get the funds you need for your business. If you are looking for contract finance in Kenya, Mwananchi Credit is here to help. Our team of experts will work with you every step of the way to make sure that everything goes smoothly. We offer flexible terms and conditions so that they fit into your budget, making it easier than ever before to start or grow your company without worrying about where the money will come from! Contact us today if you want more information on how we work with businesses that require this kind of funding. Would you like to find out more? Email us at [email protected]