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Purchase Order Finance: a new and earlier source of working capital for SMEs

When SMEs need working capital, they often need it immediately to fill a hole in their cashflow. In many situations, a new order can actually make things worse because the SME has to finance even more cash flow until they are paid. Supply chain finance provides considerable relief by bringing forward the payment to when an invoice is approved by the buyer. However, that can be many weeks or even months after the buyer places the order and issues a purchase order. Freeing up financing from the PO issuance is what Purchase Order Finance is all about:

Source & Copyright©2017 - SMECapital Finance 

New PO Finance platform

A new PO Finance platform is coming to market in the UK which could make working capital management for SMEs much easier by providing them with working capital far earlier in the traditional cash flow from when the PO is issued rather than when the invoice is issued. They even envisage the Purchase Order Finance (POF) combining with the supplier’s existing invoice driven financing to get the best of both worlds:

Source & Copyright©2017 - SMECapital Finance 

The new cashflow from using SME’s Cash Flow with Purchase Order Finance is shown below:

Source & Copyright©2017 -SMECapital Finance 

It could deliver up to 8-9 months before normal invoice payment.

SMECapital Finance have developed a cloud based platform to support their Purchase Order Finance operation which:

  • relies on the covenant of the buyer not the supplier
  • requires buyer to sign SMECF’s 'Undertaking'
  • buyer retains control of contract and which suppliers qualify.

How SMECapital Finance POF works:

  • PO issued by the buyer
  • supplier receives an initial remittance of up to 50% of the purchase order value (less fees) from SME Capital Finance
  • supplier delivers the goods/services to the buyer
  • buyer accepts the goods/services
  • invoice is raised by the supplier
  • invoice is approved by the buyer
  • buyer pays 100% of the invoice value to SME Capital Finance’s Fiduciary Agent’s trust account
  • SME Capital Finance remits the remaining balance to the supplier.

CTMfile take: Purchase Order Finance has always been a financing opportunity, but to do this needs an easy to use platform that brings all the players together. Developing such a platform is an immense achievement by SMECapital Finance. The opportunity is huge, and when rolled out to SMEs, it could become a vital part of financing their cash flow. CTMfile will be covering this in more detail in the coming months.

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