The Strategic Value of Contract Advances

A contract advance is a type of asset-backed lending. Startups that have secured contracts from credit-worthy counterparties (i.e. government, large enterprise, etc) can pursue a contract advance to receive part of that contract value today. One such pioneering entity, Enduring Planet, offers specialized financial products that cater to startups engaged in government contracts and grants. As explained by Dimitry Gershenson, the CEO of Enduring Planet, their offerings are designed to support the liquidity and growth of startups in the climate sector by providing timely financial advances against government contracts and grants.

Understanding Government Contract and Grant Advances
Government contracts and grants typically pay on a reimbursement basis or following the completion of specific milestones, requiring recipients to complete substantial work and expend working capital before receiving funds. This delay can strain startups’ liquidity, hindering their operational capabilities and growth. Enduring Planet addresses this issue by offering two main types of financing: government contract advances and grant financing. In both cases, Enduring Planet can provide a term loan of up to 80% of the expected value of payments under the grant or contract over the subsequent 12-18 months. For example, if you’re expecting $500K in payments from the Department of Energy in the next year, Enduring Planet can provide you with $400K today.

Criteria and Eligibility for Startups
The eligibility criteria for these financial products are straightforward, aiming to include as many climate-focused startups as possible. The primary requirement is possessing a government grant or contract. While any climate-focused startup with a government grant or contract can apply, the best candidates are those that have previously engaged in similar contracts or grants, as this demonstrates a proven track record and reduces performance risk. However, this is not a requirement for Enduring Planet’s funding. Beyond this, Enduring Planet evaluates other factors such as liquidity and runway, other corporate financial metrics, and other factors that might drive repayment under the grant or contract.

Considerations before Pursuing Government Contract and Grant Advances
There are a few pieces to consider when pursuing contract and grant advances. Benefits include:
• Quasi-Secured Financing: Advances are secured only against the contract’s receivables, which allows for more favorable borrowing terms than a completely unsecured loan but does not have the adverse impact of a senior-secured fully collateralized loan from a bank or similar institution.
• Flexible Repayment: Payments are made as the business receives payments from the contract, aligning loan repayment with the company’s cash flow.
• Immediate Project Initiation: Enables companies to move more quickly on project execution, rather than having to wait for reimbursements to come in after every step.
• Cash Flow Management: Facilitates better cash management, ensuring operational costs, payments to sub-contractors, equipment purchases, and payroll are covered without waiting for potentially delayed payments.
• Non-Dilutive: With no warrants and no conversion terms, there is no dilution of ownership for the company’s founders or existing shareholders, unlike equity financing options.

While contract advances offer numerous benefits, they also come with some challenges:
• Cost of Capital: The associated costs can be higher than traditional bank loans, requiring careful evaluation to ensure alignment with project margins. This is largely due to the reduced security/collateral requirements. Most bank loans in these contexts also require a personal guarantee.
• Contractual Restrictions: Some contracts may have terms that restrict the assignment of receivables, which could complicate financing.

Why Work with Enduring Planet?
Choosing Enduring Planet over other financial providers offers several advantages:
• Speed and Simplicity: The review and diligence is streamlined, typically providing decision and a signed term sheet within a week, with funding in 1 month.
• Competitive Pricing: Interest rates are competitive, ranging from 16.5% to 18.5%, with no hidden fees.
• No Custodial Account: unlike other contract finance lenders, Enduring Planet does not require you to move your grant/contract receivables into a separate account that they control.
• No Personal Guarantees or Other Burdensome Collateral
• No Contractual Restrictions

TLDR
By providing immediate funding based on the value of contractual receivables, these advances help companies manage cash flow, initiate projects promptly, and mitigate the risks associated with payment delays. As with any financial decision, companies should consider the terms and costs of contract advances carefully to ensure they complement their overall financial strategy and project requirements.

For more info on RBF with Enduring Planet.