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How Contract Financing Works

January 27, 2023
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Startups are known for being scrappy and yours is no different. You have to be - you're trying to build something from nothing. So when it comes to financing operations, you need to get creative.

One way you can stretch your budget is by using contract financing to get better deals on your software spend. This type of financing allows startups to finance the purchase of software, giving you more money to reinvest in other areas of the business.

It's a smart way to maximize limited resources and it can help you get the tools needed to continue growing your business. Here’s how it works and how you can benefit from it.

How Contract Financing for Software Works

Contract financing grants access to non-dilutive capital to purchase the tools you need, while paying for them on your terms. Software vendors may require larger commitments or upfront annual payments, which can be a huge drain on your cash flow and harmful to your runway. The high cost of software and infrastructure can be a major hurdle, disallowing younger companies from accessing enterprise grade software.  

Software financing solutions, however, makes best-in-class software accessible for businesses with smaller budgets by enabling them to pay for it on their terms, regardless of vendor policies.

You Select (or Negotiate) an Annual Subscription

The first step in financing your software is to select a contract you'd like to finance. Consider your more strategic tools that come at a higher cost but are mission-critical. If your budget could cover the costs monthly but is struggling with the annual commitment, you have found a great candidate for contract financing. 

 

You can even finance a multi-year contract with monthly payment terms if it means getting the right tool for your business at the best price.

Your Financing Partner Pays the Vendor

Once you choose the right tool, you can sign up through the vendor’s standard purchasing channels. You can schedule demos, customize your implementation, and sign up for support packages as you normally would. When it comes time to pay, just use your financing partner as your payment method.

Much like a mortgage pre-pays for a house, your financing partner will pay your vendor upfront for you.

Select a Custom Payment Term 

With a contract financing platform like Gynger, the next step will be to select a custom payment plan. You can spread out your payments over 3-12 months for annual contracts, or 24-36 months for multi-year contracts.

With contract financing, you can decide how you'd like to pay your software and infrastructure vendors. 

Once you have selected your payment plan, you enjoy complete control over your software payments. While your vendors earn up-front payment, your financing partner handles a distributed payment schedule for your benefit.

With the help of partners like Gynger, you can pay your vendors upfront while maintaining a payment schedule that works best for you. This allows you to access the tools you need regardless of the payment terms that each vendor requires.

Manage All Your Contracts in One Dashboard 

With a financing partner like Gynger, you can manage all your deferred payments through a single provider and single dashboard. 

Gynger makes it possible to build a custom schedule for all deferred payments through one provider and dashboard, so you can streamline all of your vendors through one platform. 

Examples of Contract Financing for Software

Not sure how you’d use contract financing? Here are examples of when it would come in handy.

Example 1: Investing in Your Digital Infrastructure

The strength of your business today relies on the strength of your infrastructure. Clients rely on stable servers, resource access, and advanced cybersecurity to feel safe working with any modern brand. However, investing in high-value infrastructure like AWS servers and data services have a cost steep enough to be prohibitive to small businesses. Instead of risking your startup on lower-value hosting services, financing allows you to jump right in to top-end performance and reliability to build a strong digital brand reputation (and efficient internal performance) from day one.

Example 2: Funding a Business Expansion

Your business is ready to grow, but your current software isn't able to keep up. There is a better tool on the market that does everything you need and is attuned to your specific industry. The reviews are great, and other professionals recommend the software, but the total amount to subscribe and migrate your operations to the new tool is more than you can comfortably put down.

With contract financing, you can fund the one-time data migration to a new system and your large annual subscription to the service, while distributing the payments over one to three years. With a financing solution like this available, a large upgrade and migration become something easily financed without impacting your balance sheet beyond reason.

How to Save Money By Dispersing Large Subscription Costs

Contract financing opens doors for businesses of all types and sizes. It can unlock out-of-reach goals and allow you to obtain best-in-class software by turning a large annual sum into manageable monthly payments.

 

Additionally, not only can contract financing help you spend more effectively - it can also help you save money. While granting you greater financial maneuverability, a contract financing tool can also unlock negotiating opportunities. Let's take a closer look at how contract financing saves money for your team.

Claiming the Discount for Annual Payments to Vendors

When you look at software subscription options, the subscriptions gain value with the size and commitment of the contract. Contract financing allows you to commit to a larger and longer-term software contract so you can claim these discounts, while continuing to pay on a monthly rate. 

This way, your business enjoys the savings of a more efficient annual subscription and all the features and support of a higher-tier customer.

Minimize Overhead by Combining Vendor Payments

The modern business tech stack is more complex than a game of Jenga. A single business is likely to have dozens of products in use.

However, paying your full suite of software providers can be a nightmare for your finance team. If you have over 100 paid software services in your stack, that's 100+ individual invoices your finance team needs to process.

By offloading individual payments to your contract financing partner they will pay them for you, which will save time and money, while you pay just one monthly invoice instead of dozens.

Limitations of Traditional Lending Approval

Securing private funding for your business is not always easy. Lenders advertise that business loans and lines of credit are available, no matter how big or small. 

However, this is not always the case. Like any loan, your business must first go through the approval process. Lenders will assess your application for financing based on your business credit score, sufficient and stable income, and debt-to-income ratio. Early financing options give you the ability to both build your initial startup credit score and create a positive history of debt repayment.

Getting Approved With Gynger

Gynger, on the other hand, was designed to empower businesses of all sizes. Built for simplicity and speed, you can access capital needed to invest in your business in minutes.

Where a traditional lender’s approval process tends to favor more established companies, Gynger simplifies the process of getting approved for financing into a simple application that takes just a few minutes to complete. Here’s how it works:

  • Sign up and provide basic information about your business.
  • Securely link your bank account via Plaid so we can underwrite you and determine how much capital will be made available to you
  • Identify an Authorized Signer to sign our financing agreement.
  • Select the contracts you want to finance.

Contract Financing at Your Fingertips

If you are a small business, an early-stage startup, or a scaling enterprise looking for a better financial solution, Gynger is here to help.

Get pre-approved today.  

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