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How SMEs Can Unlock Growth with Purchase Order Financing (Without Cash Flow Worries)
2 Apr 2025 • Adeboye Idowu
Many SMEs struggle to fulfill large orders due to cash flow constraints which could be solved with purchase order financing (PO financing).
What is Purchase Order Financing?
Purchase Order Financing (PO Financing) is a short-term funding option that gives businesses the money they need to pay their suppliers when they have large orders to fill. This helps businesses get the supplies they need without waiting for customer payments.
How does Purchase Order Financing Work?
PO Financing is designed to be a fast and flexible alternative to traditional loans, which can be harder for small businesses to obtain.
Step 1: Application: A business submits a purchase order from a reliable customer to the financing company.
Step 2: Approval: The financing company checks the customer’s creditworthiness and the purchase order.
Step 3: Funding: Once approved, the financing company pays the supplier directly.
Step 4: Fulfilment: The supplier delivers the goods to the customer.
Step 5: Repayment: The customer pays for the order, the financing company deducts their fee, and the remaining funds go to the business.
Comparison with Traditional Financing Options
Speed: PO Financing is typically quicker than traditional bank loans, which can involve lengthy approval processes.
Flexibility: Traditional loans may not have restrictions on fund usage, while PO Financing is specifically for fulfilling purchase orders.
Accessibility: PO Financing often requires less stringent credit checks and no collateral, making it easier for startups and small businesses to qualify. The International Chamber of Commerce highlights that this can be particularly advantageous in emerging markets.
Key Benefits to SMEs
Immediate Cash Flow Improvement
Quick Access to Funds: Purchase Order Financing provides immediate cash, helping businesses manage their cash flow better, which is crucial in avoiding operational disruptions.
Impact in Africa: This is especially important in emerging countries, where delays in customer payments can create significant financial strain on businesses. The importance of small and medium-sized enterprises, which represent nearly 90% of all businesses in Senegal, justifies the need for flexible financing options.
No Need for Long-Term Debt
Short-Term Solution: PO Financing is transaction-specific and doesn’t add long-term debt, reducing the financial burden on businesses.
Local Insight: For small merchants, options which can allow them to avoid long-term debt are vital for stimulating the strength of the local economy.
Ability to Fulfill Large and Lucrative Orders
Growth Opportunity: With PO Financing, businesses can accept and fulfil large orders, driving growth. The International Chamber of Commerce (ICC) reports that businesses using PO Financing often experience higher growth rates due to their ability to take on more significant orders.
Strengthening Supplier Relationships
Reliable Payments: By ensuring suppliers are paid on time, businesses can strengthen their relationships with them, potentially securing better terms and services in the future.
Purchase Order Financing Example
Imagine you are a food supplier in Nigeria and just received a large purchase order (PO) from Tesco Supermarket for 500 metric tons of potatoes. The PO is to be settled in 60 days.
To fulfill this order, you need to procure potatoes from multiple smallholder farmers and cover logistics, storage, and quality assurance costs.
Since retailers like Tesco Supermarket often buy on credit, there is a significant gap between when the goods are delivered and when payment is made. This disrupts your cash flow, making it difficult to pay farmers and suppliers upfront.
How Can You Fulfill the PO Without Sufficient Cash?
This is where PO Financing comes in. With a confirmed PO from Tesco Supermarket, you can secure financing to cover supplier costs. Since Tesco Supermarket is a well-established retailer, the financier views the transaction as lower risk.
Cost Breakdown
A financier agrees to fund a percentage of the supplier costs, while you cover the rest.
Let’s assume: The lender finances 50% of the supplier costs.
The interest charged is 3% per 30 days.
For a $1,000,000 PO, the financing cost for 60 days is:
$1,000,000 × 0.03 = $30,000
$30,000 × 2 = $60,000
The lender pays suppliers directly, ensuring smooth procurement and delivery.
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