Purchase Order (PO) Financing is a hugely progressive working capital solution. It enables an SME to leverage their “Future Receivables” to fund the large orders they receive.
How PO Financing Works
Purchase Orders (PO’s), Statements of Works (SOW’s) and Approved Contracts are known as “Future Receivables”. SME’s trade their Future Receivables with a pool of Capital Markets Funders via an online platform. Funds are used to pay Suppliers, Sub Contractors or internal costs to fulfil the order. It means that Suppliers are paid upfront ensuring a favourable outcome for the SME – high quality materials, fast delivery and security of supply.
So, why is PO Finance an Essential Source of Funding?
1 Enables Tendering for Larger Orders
Many SME’s, even well-established large companies face the challenge of a shortfall in their working capital when they win a large order. Many businesses are almost ‘afraid’ to win large tenders in case they won’t be able to fund them. The challenge should be winning the business not the financing of the order. PO Finance completely solves this problem and importantly, this finance is secured by the PO itself – not based on providing additional collateral or Personal Guarantees.
2 Speed is Critical
Borrowing generally takes weeks and months to complete. If an SME cannot accept a large sales order quickly, their Customer may soon become an ex-Customer. PO Financing is fast, set up within a matter of days. Within 24 hours, cash released from the PO or contract is available to pay Suppliers. Businesses can take advantage of volume purchasing and generally negotiate more favourable terms with Suppliers and vendors to increase their profit margin.
3 Catalyst for Growth
The business can focus on the delivery of the order and ensure they meet operational expectations without delay. It enables the SME to tender for larger orders faster without incurring working capital constraint.
4 No Funding Limitation
The Buyers are Capital Markets institutional funders, Pension Funds, Corporates and sophisticated Investors. There is a large pool of funders who understand risk and “buy risk”. The fact that there is not just one entity but a pool of funders purchasing the Receivables (Invoices or Purchase Orders) is important for the SME. It eliminates the requirement for limits to be placed on their funding. Many SME’s using an Invoice Discounting Facility will have experienced funding limits from time to time due to Debtor Concentration (over exposure to one Debtor) or Geographic Limits (based on the legal system of the country of export).
5 No Lock-In’s
Having a pool of funders extinguishes the need for any long-term commitment, lock-ins or fixed costs. At no stage is there an ask for a Personal Guarantee. This funding solution puts control back into the hands of the SME and allows them to decide when they need to access funding and on their terms.
6 ‘Carve Out’ Debtors
PO Finance works in tandem with existing facilities. An SME can choose to ‘carve out’ specific Debtors and their Invoices or Purchase Orders to trade on the Platform. Day to day, the SME uploads Invoices or Purchase Orders to the online platform for Buyers to purchase. It’s that straightforward.
7 Sale of an Asset, Not an Extension of Credit
With a robust legal framework, the SME is selling their asset or Receivable, (eg. Purchase Order, Invoice, Recurring Revenue) to Capital Markets Funders. It is not an extension of credit. For an SME, this is probably the most impactful feature of this source of funding.
In conclusion, PO Finance is fast and hugely flexible. When PO Finance is integrated into business development projections, SME’s can tender for larger sales orders with the knowledge of a dedicated source of funding. It’s a true catalyst for business growth.