Artha CreditPO financing can be availed by any business purchasing a raw materials or equipment to fulfil a large order. The financing can be made against invoices for goods already purchased by the SME or against a proforma invoice issued by a vendor who will supply the goods being financed. In case of the former, the funds are credited directly into the SME’s bank account whereas, in case of the latter, the lenders on the Artha Credit platform may prefer to make payment for the purchase directly to the goods supplier. Hence the loan request should ideally be raised before the goods have been purchased and paid for.
The lender may have a charge on the receivables due from the SME’s customer which raised the purchase order. In addition, the goods being financed through the purchase may be hypothecated to the lender. In case of the former, the lender may require the payment under the receivables raised on the customer be directly credited to the SME’s account with the lender. Lenders may also require additional collateral from the borrower depending on the risk appetite and internal guidelines of the bank.
SMEs can raise funds up to a maximum of 70-80% of the outstanding value of the purchase order.
A borrower can avail a PO financing facility for a maximum tenor of 1 year from the date of disbursement. However, the actual tenor of the loan will depend on the goods (raw material etc.) being purchased and production period, the working capital cycle of the industry, credit period given to customer (purchaser), the amount of the loan, the market standards regarding similar loans, the risk appetite of the lenders and other considerations that the lenders may have in determining the terms of the loan.
Typically, the types of businesses that might use PO financing include distributors, resellers, wholesalers, businesses with heavily seasonal sales patterns, businesses with tight cash flow who have a need to purchase materials to fulfilling orders.
PO financing allows a SME the money required to fulfil an order which would otherwise be difficult given the large initial outlay of funds required. The lender also acts as a collection agency, so the SME does have to worry about trying to track down payments from their customers.
Purchase order, or, “PO financing” is an arrangement where a
lender agrees to give a SME enough money to process a customer’s purchase order.
By using the facility to fund purchase orders, SMEs (suppliers) can fulfil their
customers’ needs while continuing to grow their operations. Lenders find it
convenient to lend against a PO because there is certainty of revenue for the
client, so effectively, the lender is advancing a loan against a future cash
flow of the SME.
In some cases, PO financing will cover an entire order while in other cases
they may only finance a portion of it. When the SME is ready to ship the
order, the lender collects payment directly from the customer. After repayment
of the loan amount along with the accrued interest, the balance funds can be
credited by the lender back to the SME. For SMEs requiring urgent access to cash
needed to fulfil a large purchase order that comes in, PO financing is an ideal solution.
SMEs need to acquire raw materials, equipment and other ancillary materials to meet a PO issued by a customer. In case of a large PO, the SME will need to make substantial financial outlay to meet the customer’s order requirements. In many cases SMEs do not have adequate working capital to complete the order and they need funds against the PO. This is more common in industries where the working capital cycle is long and the cost of raw materials or equipment may be very expensive. Here are a few examples of customers use of line of credit for PO financing:
On receipt of a Purchase Order from its customer, the SME identifies
the goods (raw materials or equipment) which it needs to purchase to fulfil the order.
Since the cost of purchasing these goods is usually high, the Business would typically
prefer to fund the purchase through a PO financing facility. The SME would either
purchase the raw materials etc. before requesting for financing or ask his supplier
to raise a proforma invoice which is then submitted to the lender along with the PO
received from the customer to avail the loan. The SME may also offer any additional
collateral to the lender apart from a charge on the receivables against the purchase
order issued.
The lender would assess factors such as the credit worthiness of the customer
(PO issuer), the track record of the SME borrower or whether the Purchase Order
is non-cancellable or not. The lender would, also ensure to keep a margin and
finance only a portion of the PO value – typically not more than 70-80% of the
value of the PO. The lender usually gets repaid by receiving the funds directly
from the customer. The bank would deduct the loan amount along with interest
accrued and any other charges as applicable. Post these deductions, any excess
balance received is credited back to the SME. Thus, the loan repayment is typically
at maturity of the PO invoice.
PO financing enables quick availability of finance when a SME receives a large order all of a sudden.
Though PO financing is considered one of the better sources for credit from lenders, they have their downsides. A few disadvantages of PO financing are:
Different lenders have different criteria for approval. On average, however, SMEs that qualify for PO financing usually tend to have the following traits in common:
Here is a list of documents required by the lender to provide PO Financing facility: