Is it worth borrowing to fund a bigger contract?

2 min read

Margin covers costContract > finance

Payment reliabilityWill they pay on time?

Fund deliveryNot speculation

Match to the contractTerm to payment

Funding a won contract is a strong case

Borrowing to deliver a contract you have already won is one of the sounder reasons to take on finance. You are funding the materials, labour and working capital needed to fulfil a specific, revenue-generating job — not speculating. If the contract's margin comfortably exceeds the cost of the finance needed to deliver it, the borrowing pays for itself out of the contract. See bridging the gap to first payment.

The reliability question

The case rests on getting paid. A bigger contract with a slow-paying or shaky customer can create a dangerous gap: you have funded delivery, but the money to repay the finance is late or at risk. Assess the customer's payment reliability and terms as carefully as the margin. Stage payments, retentions and long terms all lengthen the bridge the finance must cover. See covering costs before you're paid.

Matching the finance to the contract

Fund the contract with finance matched to its cash-flow shape. If you are paid on completion, you need finance covering the whole delivery period; if paid in stages, a facility you draw and repay as stages settle. Invoice finance can suit contract work by advancing against the invoices as you raise them. Size and structure the finance to the contract, not to a round number. See sector context in construction funding.

Model the finance cost against the margin on the true cost calculator, then apply to fund the contract.

Frequently asked questions

Is borrowing to fund a contract risky?

Less so than most borrowing, because you are funding delivery of a specific, revenue-generating job rather than speculating — provided two things hold: the contract's margin covers the finance cost, and the customer will actually pay on the agreed terms. The main risk is a reliable-looking contract with an unreliable payer, which leaves you having funded delivery with no timely income to repay the finance.

What finance is best for a large contract?

Match it to how you are paid. If paid on completion, finance covering the full delivery period; if paid in stages, a facility you draw and repay as each stage settles. Invoice finance suits contract work by advancing against invoices as you raise them, shortening the gap between doing the work and being paid. Structure the finance to the contract's cash-flow shape.