Funding a Larger Software Development Contract

A signed contract does not remove cash-flow risk

A larger software development contract may be commercially attractive but still require recruitment, contractors, software and delivery costs before the first milestone is paid. The contract should be assessed as a delivery and cash-flow plan, not simply as future revenue.

Start by mapping when each cost is incurred, when each invoice can be issued, when the customer is expected to pay and what happens if acceptance or delivery is delayed.

Milestone payments and mobilisation

Milestones should relate to work that can be evidenced and accepted. A deposit or mobilisation payment can reduce the amount the developer must fund, while staged billing can bring receipts closer to delivery costs. Review notice periods, acceptance wording, retainage, dispute rights and payment terms before relying on the contract.

Do not treat a sales pipeline or unsigned proposal as equivalent to a signed contract. Even signed work can be changed, delayed or cancelled under its terms.

Recruitment and delivery capacity

Recruiting developers before a project starts can create a payroll commitment that continues if the customer delays. Contractors may have their own payment terms, and specialist capacity may be difficult to replace. Consider phased recruitment, existing staff capacity, supplier terms and whether the scope can be delivered in smaller releases.

Scope, margin and cost overruns

Estimate the cost of the agreed scope and identify assumptions about integrations, data, security, testing and customer feedback. A contract margin can be reduced by rework, additional requirements, delays and unpaid change requests. Finance costs must be included in the assessment. If the margin cannot absorb the cost of funding the delivery gap, resizing or declining the contract may be safer.

Possible ways to fund delivery

Existing cash or retained profit may cover a defined mobilisation cost. A customer deposit, staged billing or improved supplier and contractor terms can align receipts with expenditure. Eligible completed B2B invoices may be considered for invoice finance. An appropriate working-capital facility or unsecured business loan may be considered where the wider business and repayment source support it.

Finance is not automatically the best response. Reduce or delay recruitment, narrow the first release, negotiate a deposit, or decline work that would place the wider business under excessive pressure.

What lenders may examine

• The trading history, accounts, management information and bank statements of the business.
• The signed contract, customer, milestones, billing terms, acceptance process and payment history.
• Delivery costs, payroll, contractor commitments, gross margin, existing borrowing and cash generation.
• Scope risk, customer concentration, other contracted work and the intended use of funds.
• The credible repayment source and any personal guarantee or security requirements.

Requirements vary by lender and facility. A contract supports an assessment, but it does not create automatic eligibility or remove repayment risk.

When borrowing may be unsuitable

Borrowing may be unsuitable where the project depends on unproven technical work, the customer has not committed to clear payment terms, the margin is uncertain, or repayment depends on winning further work. Repeated borrowing to cover delivery losses should be treated as a warning sign. Customer funding, a smaller scope, a founder contribution or equity may be alternatives in the right circumstances. LoanLogic does not provide equity investment or grants.

LoanLogic's brokerage role

LoanLogic is an independent commercial finance brokerage, not a lender. It can help separate mobilisation, recruitment, delivery and working-capital costs, examine the repayment position, prepare information a lender may request and approach relevant lenders where a commercial finance application is appropriate. No approval or outcome is guaranteed.

Read the technology business finance guide for wider contract and working-capital considerations. A Funding Readiness Review can help organise the contract, forecast and supporting information before an application is considered.