The contract cash gap

A signed contract is a promise of future revenue. It is not cash. Between signing and the first payment, your costs run ahead of your income. The bigger the contract compared to your normal monthly revenue, the wider the gap.

The gap has three parts:

• Mobilization. Getting ready to perform: permits, bonds, insurance certificates, site setup, tools, software licenses, hiring and training.
• Materials and labor. Suppliers often want payment on order or within 30 days. Your people are paid weekly or every two weeks.
• The payment wait. After you invoice, the customer’s terms begin. Add the customer’s approval process and the real wait is often longer than the stated terms.

Picture a 90-day job billed at the end on net-60 terms. You could carry costs for five months before any cash arrives. Many profitable businesses run short during that stretch. The work is sound. The timing is the problem.

How net-30, net-60 and net-90 change the math

Before you sign, negotiate what you can. Ask for a mobilization payment or deposit. Ask for progress billing instead of one invoice at the end. Ask for shorter terms. Every improvement reduces the amount you need to bridge.

Government and commercial contracts

Both kinds of contract create a gap. They behave differently.

Government contracts

Agencies and school districts are dependable payers, but the process is formal. Invoices must match the contract exactly and pass through approvals. An error can restart the clock. You may also need bonds and insurance before work starts, which adds to mobilization costs. Plan for the paperwork time, not just the stated terms.

Commercial contracts

Large companies often set long terms for their vendors, and a small supplier has little leverage. General contractors may pay subcontractors only after the owner pays them. Read the payment clause closely and plan for the realistic date.

In both cases, a lender will want to see the signed contract or purchase order, the payment terms and who the customer is. A strong customer makes the future payment more certain.

How bridge funding is sized

The contract value is not the amount you need. Size the request on the cash you must spend before cash comes in.

1. List up-front costs. Mobilization, the first materials order and labor through the first payment date.
2. Subtract the deposit or mobilization payment, if the contract has one.
3. Subtract cash on hand that you can commit without starving the rest of the business.
4. Add a cushion for a late payment or a change order.
5. Check your capacity. Lenders size offers mainly on the revenue already flowing through your business bank account. The contract supports the story. Your existing revenue supports the payment.

Picture a $400,000 contract with $150,000 of costs before the first payment and a $40,000 deposit. With $30,000 of spare cash, the gap is about $80,000. Add a cushion and a request near $95,000 is reasonable. Asking for $400,000 is not.

See how much business funding you can qualify for, or run numbers in our business funding calculators.

Bridge funding options compared

On the SBA side, the agency describes a 7(a) Working Capital Pilot program that offers monitored lines of credit of up to $5 million. The SBA says it is worth considering for businesses that want to fulfill large contracts or projects or borrow against accounts receivable or inventory, and that can produce timely financial statements and receivables agings.

Faster funding usually costs more in total than bank financing. Compare the total amount repaid and the term. Then check that the contract’s profit comfortably covers that cost. If it does not, the contract may not be worth taking on those terms.

Receivables financing as an alternative

Bridge funding and receivables financing solve different halves of the gap.

• Before you invoice: there is no receivable yet. A working capital loan or line of credit covers mobilization, materials and early payroll.
• After you invoice: the receivable exists. Receivables financing can advance part of it, and the customer’s payment settles the advance.

Receivables financing leans on the strength of your customer and the invoice. It grows as your billing grows. It works well with progress billing, where each approved invoice can be turned into cash. Some businesses use both tools on one job: a bridge to start, then receivables financing once billing begins. Our construction 60-day receivables example shows the pattern.

Three illustrative scenarios

These are illustrative examples, not real clients.

A contractor

Picture a commercial electrical contractor that wins a school renovation. It needs bonds, a first materials order and six weeks of crew wages before the first progress payment. A working capital loan covers mobilization. Once pay applications are approved, the firm uses receivables financing to keep cash moving. More in construction business loans.

A manufacturer

Picture a metal fabricator with a purchase order from a large equipment maker on net-60 terms. Steel must be paid for on order, and production takes five weeks. A line of credit covers the steel and overtime. The draw is repaid when the customer pays. More in manufacturing business loans.

A professional services firm

Picture an engineering firm that lands a one-year agreement with a state agency. It must hire three engineers and buy software licenses before the first monthly invoice is approved. Bridge funding sized to ten weeks of the new payroll covers the ramp-up. More in professional services business loans.

What to have ready and how RAN Funding fits

• A short application
• The last 3 months of business bank statements (4 months in California, New York and Virginia). Personal bank statements do not count.
• The signed contract or purchase order, with payment terms
• A simple budget of costs before the first payment
• An accounts receivable aging report, if you have open invoices

RAN Funding is a business financing company. We arrange funding through a network of lenders and do not lend our own money: one application for our lender network and one dedicated specialist. Our service is built for established businesses: most clients have 1+ year in business and $20,000+ in monthly revenue. Larger requests of up to $2 million can be funded in as little as 72 hours once approved. Approval depends on each lender’s review.

Common questions