We Just Won a Large Contract: How to Finance the Working Capital Before the Customer Pays

Winning a large contract is the moment every owner works toward. It is also, surprisingly often, the moment cash gets tight. The contract means hiring before the first shipment, buying materials months before the first invoice, and then waiting 45, 60, or 90 days for a customer to pay. The bigger the win relative to your current business, the bigger the gap between what you spend and what you collect.

Companies that plan the financing before the contract starts usually grow into the opportunity smoothly. Companies that discover the gap after they have committed often end up stretching suppliers, missing delivery dates, or taking expensive short-term money that eats the margin they worked to win. This guide walks through how to size the need and match it with the right structure.

Why a big contract creates a cash gap

Revenue arrives last. Before the customer pays you, you typically pay for materials or inventory, labor, freight, and sometimes tooling, equipment, or additional space. On a contract that is large relative to your existing sales, those costs arrive in a cluster at the start, while collections begin only after the first deliveries are invoiced and the customer's payment terms run out.

The result is a working capital hump. It builds during ramp-up, peaks around the time the first invoices are outstanding, and then flattens once collections start keeping pace with spending. The financing question is how high the hump gets and how long it lasts.

How to size the need

Build a simple month-by-month schedule for the first six to twelve months of the contract. For each month, list:

• Materials and inventory purchased, and when your suppliers expect payment
• Added payroll and subcontractor costs
• Any one-time costs such as tooling, equipment, or facility changes
• Invoices you expect to issue, based on the delivery schedule
• Cash you expect to collect, based on the customer's actual payment terms and habits

The difference between cumulative cash out and cumulative cash in is your peak need. As a simple illustration: a contract that requires $400,000 a month of materials and labor, billed monthly on net 60 terms, can put roughly three months of costs, about $1.2 million, into the business before the first payment arrives, and more if materials must be bought well ahead of production. Your own numbers will differ, but the exercise almost always shows a larger peak than owners expect.

Our guide to the cash conversion cycle explains how receivable days, inventory days, and payable days combine to drive that number.

Why your current line may not stretch

A cash-flow line is sized to last year

A bank line of credit based on historical earnings was sized for the business you were, not the one the contract will make you. The bank may be willing to increase it, but usually only after seeing results, which is backwards from what a ramp-up needs.

A borrowing-base line grows, but with a lag

An asset-based line lends against receivables and inventory, so availability rises as the contract produces invoices and inventory. That is a good fit for growth, but there is a lag: the costs of hiring and early purchases hit before eligible collateral exists. The largest part of the hump usually sits in that window. Our borrowing base walkthrough shows how availability is calculated.

One customer can hit a concentration limit

If the new customer quickly becomes a large share of your receivables, most asset-based agreements cap how much of a single customer's balance counts toward availability. A big contract can push you over that cap, so some of the new invoices may not help your borrowing base as much as you expect. Our guide to customer concentration limits explains how the cap works and when lenders will raise it for a strong customer.

Financing options that fit a contract ramp

Increase or restructure your line of credit

If you already have an asset-based facility, ask whether it has an accordion feature or whether the lender will increase the commitment and the concentration limit for this customer. Our guide to accordion and incremental capacity covers how that works. If you have a bank line that was sized to earnings, a contract of this size is often the moment to move to a borrowing-base structure that grows with the business.

Customer deposits or milestone billing

The cheapest financing often comes from the customer. Ask whether the contract can include a deposit, progress billing, or milestone payments. Large customers sometimes agree, especially where you are buying custom materials on their behalf. Keep in mind that deposits and pre-billed amounts are usually treated differently from ordinary receivables in a borrowing base; see our guide to customer deposits and pre-billed receivables.

Purchase-order financing for the early window

Where the gap is mostly supplier payments before goods exist, purchase-order financing can pay suppliers directly against a confirmed customer order. It is generally more expensive than a line of credit and works best as a bridge until invoices are generated. Our comparison of purchase-order financing and ABL explains when each fits.

Equipment financing for capital needs

If the contract requires new machinery or vehicles, financing those separately keeps them from consuming working capital availability. Many borrowers pair an equipment loan with their line of credit.

Supplier terms

Suppliers who will also benefit from your contract may extend terms or hold inventory for you. Ask directly, and put anything you agree on in writing.

What lenders will want to see

A lender asked to finance a contract ramp is really being asked to believe three things: the contract is real, you can perform it, and the customer will pay. Help them get there.

• The contract or purchase order itself, including pricing, quantities, delivery schedule, payment terms, and any termination or penalty clauses.
• Your month-by-month cash schedule, showing the peak need and when it resolves.
• Margin on the contract. A large contract at a thin margin can strain the business more than it helps.
• Evidence you can perform, such as capacity, staffing plans, supplier commitments, and past work of similar scale.
• The customer's credit quality and payment history, if you have worked with them before.
• How the contract changes your concentration, and your plan to keep the rest of the business healthy.

Contracts with government customers bring their own rules. If yours is a federal contract, read our guide to preparing federal receivables for lender review.

Common mistakes

Signing before the financing is in place. Assuming your current lender will increase the line without new information. Forgetting the concentration cap. Underestimating how long the customer actually takes to pay. Using high-cost daily-payment products to cover a gap that a properly structured line could have handled. Each of these is avoidable with a few weeks of planning.

How DCE helps

Don Clarke is a 2021 SFNet Hall of Fame inductee, a Lifetime Achievement Award recipient, and the author of "Asset Based Lending Disciplines," the first textbook on asset-based lending. He has trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, Barclays, and other institutions. That background helps borrowers present a contract ramp the way a lender needs to see it.

DCE is an independent advisor and loan placement consultant. We help borrowers size the working capital a new contract requires, prepare the information lenders ask for, and introduce them to lenders whose appetite fits the opportunity. We do not lend, underwrite, fund, or approve financing; every credit decision is made by the lender. See our advisory services and how our process works.

Our sister firm, ABLC (ablc.net), serves lenders with due diligence, field examination, and training services.

Educational only; not legal, tax, or investment advice. Figures in this article are illustrations, not quotes or offers. Financing availability and terms depend on each lender's review of the business.