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Payroll doesn’t wait for your customers to pay their invoices. When you’re managing a contract that requires significant labor upfront, you may have to cover several weeks of wages before the first payment comes in.
Contract financing can help bridge that gap, but how do you know which payroll financing is right for your business? You’ll need to consider how much you can borrow, how quickly you can access the money, what it will cost, and how repayment will affect your business cash flow.
Here are five steps to help you evaluate your options.
Step 1: Understand which payroll costs you need to cover
Before exploring financing options, it’s important to distinguish between two types of labor expenses.
Staff payroll includes wages and salaries for employees who support your day-to-day business operations, such as office managers and administrative staff. These overhead expenses continue regardless of which contracts you’re working on.
Direct labor payroll covers the employees who perform work associated with a specific contract. For construction subcontractors, that might include crews working on-site. For staffing companies, it could mean employees assigned to fulfill a client’s contract. Depending on the financing arrangement, eligible direct labor costs may also include payments to subcontracted crews.
Because contract financing is tied to a specific project, check which labor expenses are eligible before comparing funding options.
Step 2: Compare financing terms and total costs
The amount you can borrow is important, but you’ll also need to understand how the financing works and what you’ll pay for it.
Some questions to ask include:
- How much funding is available? Will it cover the direct labor expenses you’ll incur before receiving payment?
- How are fees calculated? Are costs based on the amount financed, the length of the financing period, or another factor?
- When does repayment begin? Does the schedule align with when you expect to receive contract payments?
- Are there additional costs? Ask about origination fees, administrative charges, and any other expenses that may apply.
One important note: The lowest advertised rate doesn’t always mean the best deal. Compare the total cost of each option before making a decision.
Step 3: Check how quickly you can access funding
When cash runs short, you can’t simply postpone paying your employees until a customer payment comes through. Missing payroll can damage employee trust, hurt morale, and make it harder to retain the people you need to fulfill your contracts.
With that in mind, ask prospective lenders how long approval and funding typically take, what documentation you’ll need, and whether you can access additional funds as the project progresses.
You’ll also want to know when the money will actually be available. Even an attractive financing offer won’t help much if the funds arrive after your next payroll deadline.
Step 4: Assess the impact on your working capital
This type of financing can provide breathing room when you’re waiting on customer payments, but it’s important to understand how the arrangement will affect the rest of your business.
Consider how much of your existing working capital is already committed to other contracts, overhead, equipment, and operating expenses. Then look at what happens if your customer pays later than expected.
For example, if you expect to receive payment in 30 days but it takes 60, will the financing arrangement allow you to continue paying your employees without putting other obligations at risk?
Thinking through potential delays can help you determine whether the proposed funding and repayment schedule will work for your business.
Step 5: Understand what happens after approval
Before choosing a lender, find out how the financing arrangement will work once your contract is underway. Will you have a dedicated point of contact? How will funds be disbursed, and what documentation or reporting will be required along the way?
You should also ask how easy it is to get answers or make adjustments when questions arise. The lender’s communication and ongoing support can make a real difference when you’re managing a busy project.
Mobilization Funding offers contract-based financing that helps businesses cover eligible project costs, including direct labor, before customer payments arrive. Funding and repayment are structured around each project’s cash flow, helping preserve working capital for other business needs.