Won a big contract? How to fund the work before you get paid

A contract worth twice your normal monthly turnover is the kind of win most businesses hope for. It can also be the moment cash runs out. You buy materials, take on staff and perhaps hire or buy equipment before you've delivered anything. Then you invoice, and wait 30, 60 or 90 days to be paid. The bigger the contract, the bigger the hole you have to fund in the meantime.

This guide explains how to size that gap, the ways to fund it, how to shrink it with better payment terms, and what lenders will want to see.

The scale-up gap

Every contract has a cash profile. Costs come first and often peak early, with materials ordered upfront, new staff trained and kit bought. Income comes later, and only after you've invoiced and the client's payment terms have run.

The gap is the total you've spent before enough money comes back in to cover what's going out. For most businesses it peaks in the first two or three months of a new contract.

An illustration. Say you win a six-month contract worth £300,000, invoiced at £50,000 a month on 60-day terms. Your costs are £40,000 a month, and you need £25,000 of new equipment at the start. Ignoring VAT, you're £65,000 out of pocket by the end of month one and £105,000 by the end of month two, before the first payment arrives at the end of month three. Put the equipment on asset finance with a small deposit and agree a 10% upfront payment from the client, and that peak falls to roughly £54,000. The contract makes a profit either way. These figures are an illustration, not a benchmark.

Working this out month by month, ideally week by week for the first quarter, tells you how much funding you need and for how long. Our guide to building a cash flow forecast shows how.

Shrink the gap first: payment terms

The cheapest funding is money you don't need to borrow. Before you look at finance, look at the contract.

• Ask for a deposit or an advance payment. Some clients will pay a share upfront, often called a mobilisation payment on larger contracts, especially if you can show it's going into materials for their job.
• Ask for stage payments. Being paid when you hit milestones, or monthly as work progresses, is far better than one invoice at the end.
• Negotiate shorter terms. Thirty days instead of 60 halves the time you're waiting. Larger clients may say no, but it costs nothing to ask, especially before you sign.
• Invoice promptly and correctly. A late or wrong invoice resets the clock. Know exactly what the client's accounts team needs, such as a purchase order number or signed timesheets.
• Check how fast the client really pays. Large companies have to publish their payment practices, and you can search the reports on GOV.UK. Public sector contracts generally require payment within 30 days of a valid invoice, and that term should flow down to subcontractors. Check the current rules on GOV.UK.
• Line up supplier credit. If your suppliers give you 30 or 60 days to pay, materials effectively fund themselves for that period. A signed contract can help you ask for a higher credit limit.

If a client does pay late, you have legal rights to interest and compensation. See our guide to late payment rights.

Ways to fund the work

Most contracts are best funded with a mix, each part matched to a particular cost. Using one long loan for everything usually means paying for money you only needed for a few months.

Purchase order finance

With purchase order finance (PO finance for short), a provider pays your supplier for the goods you need to fulfil a confirmed order from a creditworthy customer. When you deliver and invoice, the provider is repaid from the customer's payment, often by moving onto invoice finance.

It works best for businesses that buy in finished goods and sell them on, such as wholesalers, distributors and importers. It's less suited to contracts where most of the cost is your own labour, or where the goods need significant work before delivery. It's also usually one of the more expensive options, because the provider is funding goods that haven't been delivered yet.

Invoice finance

Once you start invoicing, invoice finance releases most of the value of each invoice within days, rather than waiting for the client's terms to run. Because the facility grows with your invoices, it suits a contract that will scale up. Our guide to invoice finance vs a business loan explains the types and costs.

It doesn't help before your first invoice, and some contracts are harder to fund this way. Applications for payment, retentions and the right to set off disputed amounts are common in construction, and only some providers will lend against them. A single large client can also make up most of your sales ledger, and many providers limit how much they'll advance against one customer.

A short-term loan or revolving credit facility

A loan of a few months to a year can cover wages, overheads and other costs that can't be financed against an asset or an invoice. A revolving credit facility, which you draw and repay as you need, can suit a gap that rises and falls. Match the term to the length of the gap.

Asset finance for new equipment

If the contract needs vans, machinery or IT equipment, hire purchase or leasing spreads the cost over the equipment's working life rather than taking a large lump out of your cash at the moment you can least afford it. The finance company owns the equipment until you've paid for it (or, with a lease, throughout), so it's often easier to arrange than unsecured lending.

What lenders check

Funding a contract is a bet on the contract being delivered and paid. Expect any lender to look at three things.

• The contract itself. Its value, length, payment schedule and terms. Lenders look closely at termination rights, retentions, set-off and anything that limits your right to pass the money owed to a finance provider. Have a signed copy ready, not just a letter of intent.
• The client's strength. A contract with a large, financially sound client or a public body is easier to fund than one with a new or stretched business. Lenders will check the client's credit record and may limit how much they'll lend against one customer.
• Your capacity to deliver. Have you done work of this size before? Do you have, or can you get, the staff, kit and management time? Is the contract profitable after every cost, including finance? A clear cash flow forecast and evidence of similar past work answer most of these questions.

They'll also look at the business as a whole: your accounts, bank statements, existing borrowing and credit history. Directors of limited companies are often asked for a personal guarantee on loans and some invoice finance facilities.

The risk of over-trading

Over-trading means taking on more work than your cash can support. It's one of the classic ways growing businesses fail: the order book is full, the work is profitable on paper, and the bank account runs dry.

Warning signs include:

• Your overdraft or facilities are fully drawn and stay that way.
• You're paying suppliers later and later, or a supplier puts you on stop.
• Tax payments are slipping, especially VAT and PAYE.
• One client is more than half your income, so any delay from them puts the whole business at risk.
• You're turning down good, smaller work because the big contract has taken every person and pound.

Funding can solve a timing gap, but it can't fix a contract priced too thinly or one that's simply too big for the business. If the forecast only works when everything goes right, consider negotiating a phased start, subcontracting part of the work or bringing in a partner.

Common mistakes to avoid

• Signing before you've worked out the cash. Once the terms are agreed, you've lost your best chance to change them.
• Funding a short gap with long debt. Matching each cost to the right product is usually cheaper.
• Forgetting VAT. Your VAT bill on the new invoices may fall due before the client has paid them, unless you're eligible for and use the Cash Accounting Scheme.
• Counting on the first payment arriving on time. Allow for the client paying late, especially the first invoice, which often gets stuck while they set you up as a supplier.
• Leaving it until the work has started. Lenders move faster and offer more when you apply with a signed contract and a plan, not an overdrawn account.

Questions people ask

Can I get finance against a contract I've won?

Yes, in several ways. Purchase order finance can pay suppliers for goods to fulfil a confirmed order, invoice finance releases cash once you invoice, and a short-term loan can cover the costs in between. Lenders will want to see the signed contract, the client's strength and your ability to deliver.

What is purchase order finance?

It's funding that pays your supplier for the goods you need to fulfil a confirmed customer order. The provider is repaid when your customer pays, often by converting to invoice finance. It suits businesses that resell goods more than those whose main cost is their own labour.

Can I use invoice finance for a new contract?

Yes, once you start invoicing. It won't fund costs before your first invoice, and contracts with applications for payment, retentions or a single dominant client can be harder to finance. Some providers specialise in these situations.

What is over-trading?

Over-trading is taking on more work than your cash can support. The business may be profitable on paper but runs out of money because costs are paid long before customers pay. Planning the cash before you sign, and funding the gap properly, is the best protection.

Should I ask a client for a deposit on a large contract?

It's reasonable to ask, especially if the work needs materials or equipment upfront. Many clients will agree to a deposit, an advance payment or stage payments, and every pound paid early is a pound you don't need to borrow.