Financing To Contractors
The financing to Contractors is extended by Banks based on the Contract awarded to them. The said financing is specific to the Contract.
Banks analyse (i) the Contract (ii) conduct a due diligence on the Contract Owner, prior to extending Contract Specific Facilities.
The Contract Specific Facilities extended by the Banks are liquidated by the periodic work-based Contract payments received from the Contract Owner. Hence, Banks analyse the feasibility to take payment risk on the Contract Owner.
The Companies need to mitigate the two prime risks that are considered by the Banks prior to extending Contract Specific Facilities:
Performance Risk: Mitigated by demonstrating to the Bank of the past track record of successfully executing similar contracts and executing contracts for the same Contract Owner.
Payment risk on the Contract Owner: Mitigated by acceptable financial condition of the Contract Owner and history of timely receipt of payments from Contract Owner on earlier executed contracts.
The financing typically includes the following Contract Specific Facilities:
Overdraft: A small value of overdraft to meet with project specific day to day expenses
Invoice Discounting: Facility is extended against project specific invoices certified by Project Consultant (appointed by the Contract Owner). Meets with the funded project requirements of the Company. Banks typically extend 70% to 90% of the Invoice value with a tenor of 60 days to 90 days.
Letter of Credit LC facility is used to source material for implementation of the contract. The LC could be local or import.
LATR Loan against Trust Receipts meets with the funded contract specific requirement. The tenor of LATR is based on the project specific cash flow.
GuaranteesThe following Contract specific guarantees are requested by Contract Owner as part of the Contract from Contractor:
Advance Payment Guarantee: 10% of the Contract Value
Performance Guarantee: 10% of the Contract Value, which reduces to 5% on contract completion
Retention Guarantee: 5% of the Contract Value