Landing a major contract can open up a new chapter for your business. It might bring increased revenue, a valuable new customer or the opportunity to step up production and grow; but bigger opportunities can bring bigger upfront costs too.
Before the first customer payment lands, you may already have had to increase stock, place larger orders with suppliers, bring in additional people or invest in machinery and capacity.
That can leave even a profitable, established business facing a temporary squeeze on working capital.
So when a sizeable new contract lands, it pays to look beyond the headline revenue and think about what it will take to get from signing the deal to receiving the cash.
Say your business has secured a contract that will significantly increase production over the next few months and there’s enough margin in the job and the numbers stack up. The challenge is what needs to happen first.
You may need to commit cash to additional materials and stock. Suppliers might need paying, production costs increase as work gets underway and perhaps the contract also means investing in additional machinery.
Only after you've produced and delivered the order can you invoice your customer. Even then, you may be waiting on agreed payment terms before the cash reaches your account.
This is why forecasting the complete order-to-cash cycle can be just as important as understanding the profitability of the contract.
Start by mapping out when cash needs to leave the business and when you realistically expect it to return. It's worth building some breathing room into those calculations too. What would a delay in production mean? What if costs were higher than expected? Or if the customer took longer to pay?
Having a clear view early on can help you work out whether existing cash and funding are enough, or whether you need extra working capital to keep the contract moving.
If you do identify a gap, take a broader look at the assets within your business. You might have money tied up in customer invoices, but that may only be part of the picture.
An established business could also hold inventory, own valuable plant and machinery or have commercial property.
Asset based lending, or ABL, can look across different eligible assets rather than focusing on just one in isolation.
That's useful because your funding needs can change as your business grows. An arrangement that worked well at one stage of your journey might not provide the same flexibility when you're taking on larger contracts or investing in greater capacity.
You don't need to decide that ABL is the solution before starting the conversation either. A better place to start is with what you want the business to achieve and what might be standing in the way.
Imagine your business already has a healthy debtor book and owns plant and machinery. The new contract will also require you to hold considerably more stock.
Rather than looking at the funding potential of each of those assets completely separately, ABL can consider several eligible asset classes as part of the overall facility. This can make it an option worth exploring for established businesses with value across their balance sheet and a growing or more complex funding requirement.
Of course, having an asset doesn't automatically mean it will be eligible for funding or that its balance-sheet value will determine how much funding is available.
Inventory is a good example. Its ownership, turnover, quality and likely resale value can all be relevant when it's assessed.
That's why understanding the individual business matters. A funding structure needs to reflect the assets available, the circumstances of the business and, importantly, what you're trying to achieve.
Before committing significant cash to delivering a new contract, take a step back and consider:
1. What will you need to pay for first?
Think about stock, materials, supplier payments, people, equipment and any other costs you'll take on before receiving payment.
2. Where will cashflow be under the most pressure?
Understanding the point at which your cash requirement peaks can help you plan for it rather than react to it.
3. What will happen to your assets as the business grows?
Consider whether receivables and stock will increase and whether you'll need to invest in machinery or other capacity.
4. How much room is there in your existing funding?
A facility that works for today's level of activity may need reviewing if your business is about to take a significant step up.
5. What happens if something takes longer than planned?
Building different scenarios into your forecast can help you understand the impact of slower payments or changes to delivery.
These questions aren't about finding a funding product straight away. They're about making sure the finances underpinning the contract are as well planned as the commercial opportunity itself.
There's a big difference between exploring funding because you've won a contract and looking for additional cash because you've already committed to delivering it.
Once you've ordered the stock, invested in equipment and have suppliers expecting payment, your options may feel more pressured.
Looking at funding earlier gives you more time to understand what the contract will require, consider the assets already available within the business and explore which options might be appropriate.
For a growing business, that can mean thinking about funding as part of the growth plan itself, rather than something to solve once cash starts getting tight.
A major contract can create a real opportunity to move your business forward, but increased revenue doesn't necessarily mean an immediate increase in available cash.
Before you commit to delivering it, ask yourself:
If the answer includes more inventory, larger supplier commitments, higher receivables or investment in machinery and capacity, it's worth exploring your funding options sooner rather than later.
ABL won't suit every business or every contract. But for an established, asset-rich business with value tied up across different parts of the balance sheet, it could be one option to consider as part of a wider growth plan.
If you're preparing for a significant new contract or planning your next stage of growth, speaking to an Aldermore specialist early can help you understand your options and explore whether asset based lending could be right for your business.
Subject to status. Security may be required. Any property or asset used as security may be at risk if you do not repay any debt secured on it.