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Securing finance is often an essential part of growing a…
Before receiving the first payment, businesses may need to purchase materials, recruit additional employees, pay subcontractors, invest in machinery or increase their operational capacity.
These upfront commitments can place considerable pressure on cash flow, even where the contract is expected to be highly profitable. For many UK SMEs, the challenge isn’t winning new business. It’s financing the work required to deliver it.
Fortunately, several commercial finance solutions can help businesses bridge the gap between securing a contract, completing the work and receiving payment.
In this guide, Liquid Corporate Finance explains how businesses can fund substantial new contracts, which finance options may be available and what lenders typically consider when assessing an application.
A profitable contract doesn’t necessarily generate immediate cash.
Many businesses operate with payment terms of 30, 60 or even 90 days, particularly when dealing with larger organisations, established contractors or public sector customers. In some industries, payment may also depend on achieving contractual milestones or completing specified stages of work.
Meanwhile, the business delivering the contract must continue meeting its financial commitments.
Common upfront expenses include:
These expenses can arise weeks or months before the business receives its first payment. As a result, a company can have a healthy order book and strong anticipated profitability while still experiencing a significant working capital shortfall.
This is particularly common among growing SMEs that have secured contracts larger than those they have previously delivered.
Contract funding is a broad term used to describe commercial finance arrangements that help businesses meet the costs associated with fulfilling customer contracts.
It isn’t necessarily a single financial product. Instead, the appropriate solution depends on the nature of the contract, the company’s financial position and when payments are expected.
For example, a business that needs to purchase machinery may benefit from asset finance, while another company that needs to pay employees before receiving customer payments may require a working capital loan.
Some businesses may benefit from a combination of funding facilities. The objective is to ensure that the company has sufficient cash available to deliver the contract without placing unnecessary pressure on its existing operations.
Consider an established engineering business that secures a new contract worth £500,000.
The company expects the contract to generate a healthy profit, but it must first purchase materials, increase staffing levels and acquire additional equipment.
Its estimated initial expenditure is:
| Expense | Estimated cost |
|---|---|
| Materials and components | £85,000 |
| Additional labour and recruitment | £45,000 |
| Specialist machinery | £60,000 |
| Transport and operational costs | £15,000 |
| Total initial expenditure | £205,000 |
The customer will make payments against agreed milestones, with the first substantial payment expected after the initial production phase. Although the contract is commercially attractive, the business needs access to approximately £205,000 before receiving sufficient customer funds.
Using existing cash reserves to meet the entire commitment could leave the company exposed to unexpected expenses or difficulties elsewhere in its operations. A carefully structured finance arrangement could help the business fund its initial requirements while preserving liquidity.
For example, machinery might be financed separately through an asset finance agreement, while a working capital facility supports labour and material expenditure.
This is an illustrative example rather than a completed Liquid Corporate Finance transaction. Funding availability depends on lender assessment and eligibility.
A commercial business loan can provide a lump sum to help meet the upfront costs of fulfilling a new contract.
Depending on the lender and the company’s circumstances, funding may be available for working capital, recruitment, materials, operational expenditure and business expansion. Repayments are normally made over an agreed period, allowing the company to spread the cost rather than relying entirely on its existing cash reserves.
When might a business loan be suitable?
A business loan may be appropriate where:
Lenders will generally assess the business’s trading performance, affordability, credit profile, existing financial commitments and the strength of the underlying contract.
A signed contract can provide useful supporting evidence, but it does not automatically guarantee approval.
Explore our Business Loans page to learn more about funding options for UK companies.
Invoice finance can be particularly useful where a business has completed work or supplied goods but must wait for its customer to pay.
Rather than waiting until the invoice due date, an eligible company may be able to access an agreed proportion of the invoice value earlier.
The two principal forms are invoice factoring and invoice discounting.
Invoice factoring
With factoring, the finance provider generally advances funds against eligible invoices and may also manage the sales ledger and collections process.
Invoice discounting
Invoice discounting allows businesses to release cash against eligible invoices while typically retaining greater control over customer relationships and collections.
Can invoice finance fund a contract before work starts?
This is an important distinction. Traditional invoice finance generally requires eligible invoices to have been raised for goods supplied or services performed.
A signed contract alone will not normally qualify for conventional invoice discounting.However, specialist contract finance or other working capital facilities may be available in some circumstances, subject to the lender’s criteria.
For businesses delivering contracts in stages, invoice finance can become particularly valuable once milestone invoices have been issued and accepted.This can help fund subsequent stages of work without waiting for earlier invoices to be settled.
Learn more about Invoice Finance and how it can support business cash flow.
A revolving credit facility provides access to an agreed credit limit that a business can draw upon as required.
Unlike a conventional term loan, which generally provides a fixed lump sum, a revolving facility can offer greater flexibility where expenditure fluctuates.
For example, a company may need additional funding at the beginning of each contract phase, followed by periods when customer payments allow it to reduce the outstanding balance.
Subject to the facility terms, repaid funds may become available to draw again.
Potential advantages
However, facilities may carry arrangement fees, interest, minimum charges or renewal conditions. Some are repayable on demand, and lenders may review or reduce limits.
A revolving credit facility can be particularly useful for businesses handling several contracts with overlapping expenditure and payment cycles.
Some contracts require businesses to invest in equipment that they do not currently own.
Examples include construction machinery, commercial vehicles, manufacturing equipment, specialist tools and material-handling equipment. Purchasing these assets outright can absorb a substantial amount of working capital.
Asset finance may allow a business to acquire qualifying equipment while spreading the cost over an agreed period. Depending on the transaction, options may include hire purchase or finance leasing.
Why consider asset finance alongside contract funding?
Returning to our illustrative £500,000 engineering contract, the business requires £60,000 of additional machinery.
Rather than including the entire machinery cost within a working capital loan, the company could explore financing that equipment separately. This may reduce the immediate cash required for the asset, although deposits, VAT, fees and repayment obligations must still be considered.
The business could then assess a separate working capital facility for its remaining requirements.This approach may help align the type of finance with the purpose of the expenditure.
Visit our Asset Finance page for further information.
The government-backed Growth Guarantee Scheme (GGS), administered by the British Business Bank, is designed to support access to finance for eligible smaller UK businesses through participating lenders.
Depending on the lender, qualifying businesses may be able to access facilities for working capital, investment or growth.
A company that has secured a substantial new contract may therefore wish to explore whether a GGS-backed facility could support its funding requirements. However, scheme eligibility, facility availability and lender appetite must all be considered.
The government guarantee is provided to the lender and does not remove the borrower’s repayment obligations. Participating lenders may also require personal guarantees, subject to the applicable scheme rules and their lending criteria.
For further information, visit our Growth Guarantee Scheme page or the British Business Bank.
There is no single solution that suits every business.
The most appropriate facility will depend on the timing of expenditure, the payment structure of the contract and the company’s wider financial circumstances.
| Funding option | Potential use |
|---|---|
| Business loan | Upfront materials, labour, recruitment and general working capital |
| Invoice finance | Releasing cash against eligible outstanding customer invoices |
| Revolving credit facility | Managing fluctuating short-term working capital requirements |
| Asset finance | Purchasing or leasing qualifying machinery, equipment and vehicles |
| Growth Guarantee Scheme facility | Eligible business investment or working capital through participating lenders |
In some cases, combining facilities may provide a more appropriate structure than relying on a single form of borrowing.
For example, a construction company may use asset finance for additional equipment while arranging separate working capital funding to support labour and material costs.
The key is to assess the complete financial requirement rather than simply applying for the largest available loan.
A substantial customer contract can strengthen a funding proposal, but lenders still need to establish that the borrowing is affordable and commercially sensible.
They will typically consider several factors.
1. The signed contract and payment terms
Lenders may want to understand the contract value, customer identity, payment schedule and any conditions attached to receiving payment.
A contract with clearly defined milestones and payment obligations may be easier to assess than an informal expression of interest.
2. The company’s financial performance
Recent accounts and management information help lenders assess turnover, profitability, cash generation and existing financial commitments.
A business that is already profitable may be better positioned to support additional borrowing, although historic profitability alone does not establish affordability.
3. Cash flow forecasts
A detailed cash flow forecast is particularly valuable where substantial expenditure occurs before customer payments.
It should demonstrate when cash is expected to leave the business, when receipts are anticipated and how finance repayments will be supported.
4. The customer’s financial standing
Where repayment depends heavily on a major customer’s payments, lenders may consider the customer’s creditworthiness and payment history.
5. Previous experience
A business with a successful record of delivering similar contracts may present a stronger proposal than one undertaking a project substantially outside its existing capabilities.
However, a new or growing business may still be considered where its directors have relevant industry experience and a credible delivery plan.
6. Existing borrowing and security
Lenders will also consider current loans, asset finance agreements, overdrafts and any available security or personal guarantees.
For more information, read our guide to what lenders look for when approving business finance.
One of the most common mistakes businesses can make is applying for finance based solely on the contract’s total value.
A £500,000 contract does not necessarily require £500,000 of borrowing. The actual requirement depends on the timing and scale of the expenditure.
A practical approach is to prepare a cash flow forecast covering the contract’s expected duration.
Start by identifying:
The objective is to establish the maximum forecast cash shortfall, including an appropriate contingency. This can help determine the amount, structure and duration of finance required.
It is also important to consider the consequences of delayed payments, additional costs or changes to the contract.
A facility that appears affordable under an optimistic forecast may become more challenging if customer receipts arrive later than anticipated.
Although working capital pressures can affect almost any business, certain sectors regularly experience significant upfront costs.
Construction and civil engineering
Construction companies may need to purchase materials, pay subcontractors and mobilise machinery before receiving certified stage payments. Contract retentions and payment delays can create additional pressure.
Manufacturing and engineering
Manufacturers may need to purchase components, recruit skilled employees and expand production capacity to fulfil larger orders.
Transport and logistics
A new distribution contract may require additional vehicles, drivers, insurance and operating expenditure before regular customer payments begin.
Recruitment and staffing
Recruitment agencies supplying temporary workers may need to pay wages weekly while customers settle invoices on longer payment terms.
Facilities management and commercial services
Large maintenance, cleaning and service contracts can require additional staff, equipment and mobilisation costs before the first payment is received.
Understanding these sector-specific challenges can help determine which type of funding is most appropriate.
Winning a major contract can create understandable pressure to secure funding quickly.
However, careful planning remains essential.
Underestimating the working capital requirement
Businesses should consider the full delivery period rather than focusing only on the initial costs.
Assuming a signed contract guarantees finance
Lenders will still assess affordability, financial performance and the risks associated with the contract.
Relying on payment dates without contingency
Late customer payments can create difficulties where loan repayments and operating expenses must continue.
Using short-term finance for long-term assets
The finance structure should reflect the expected useful life of the asset and the business’s repayment capacity.
Overlooking existing commitments
New borrowing must be affordable alongside current finance agreements and everyday business expenditure. A well-prepared application can help lenders understand the funding requirement and reduce unnecessary delays.
Can I get a business loan based on a signed contract?
Potentially. A signed contract can support a funding application by demonstrating expected future revenue. However, lenders will also assess the company’s financial performance, affordability, credit history and ability to deliver the contract.
Can a business get funding before issuing its first invoice?
Yes, depending on the business and the type of finance requested. Business loans and some specialist working capital facilities may be available before invoicing. Traditional invoice finance generally requires eligible invoices.
Can I finance labour and materials for a construction contract?
Potentially. Business loans and other working capital facilities may be used to support eligible labour, material and operational costs, subject to lender approval.
What if my customer pays on 60- or 90-day terms?
Invoice finance or other working capital facilities may help manage the gap between delivering work and receiving payment. The appropriate solution depends on the invoicing arrangements and the company’s circumstances.
Can I obtain finance for a contract larger than my company’s annual turnover?
It may be possible, but lenders are likely to examine the company’s capacity to deliver the work, the associated costs, cash flow forecasts and relevant industry experience. A large contract does not automatically justify a proportionately large loan.
How quickly can contract funding be arranged?
Timescales vary depending on the lender, the finance product, the complexity of the transaction and the information available. Straightforward applications may progress quickly, while larger or more complex facilities can require additional assessment.
Winning a substantial new contract should represent an opportunity for growth, not an unnecessary strain on your company’s cash flow.
Whether your business needs to purchase materials, recruit additional staff, acquire machinery or bridge the gap between completing work and receiving payment, appropriate commercial finance may help support delivery.
At Liquid Corporate Finance, we work with a panel of commercial lenders to help UK businesses explore suitable funding solutions.
As an independent commercial finance broker, we take the time to understand the underlying transaction, the company’s financial circumstances and the timing of its funding requirements.
Our objective is to identify a commercially appropriate funding structure that supports your business without overlooking affordability or existing commitments.
If your company has secured a significant new contract and needs funding to fulfil it, contact Liquid Corporate Finance to discuss your options.
Liquid Corporate Finance Limited is a credit broker, not a lender. Finance is subject to status, lender assessment, eligibility and terms. This article provides general information for UK businesses and does not constitute financial or legal advice.
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