You will always struggle to get a tender or the word out about your new business and the brand new products you display for the customers. You are excited to showcase your business to the world and ask your friends and family to support your new company and business, but sometimes that is just not sufficient. You look for other alternatives, financial sources like capital ventures, crowd-funding, and banks. It also becomes a hassle to secure a local purchase order.
WHAT IS LPO?
A local purchase order or LPO is a document and a legal paper sent by the distributor or supplier to a vendor or a seller authorizing the dispatch and shipment of a certain item to the client at a particular price and terms. The local purchase order financing agreement contains the item, the quantity of the items, terms of payment, the price per unit of the item, identity of the vendor, and delivery date of the item.
This document cannot be changed and edited once it is given out as it is a legally binding agreement. The changes can only be done with the involvement and decision of the two involved parties.
Local purchase order financing is designed to support businesses and companies that do not have sufficient cash or working capital. You do not require having any kind of security when it comes to physical assets with LPO, other loans may need this. This is one of the important advantages of LPO financing.
The LPO finance protects the vendor from losses and the buyer from getting incorrect products.
BANKS AND LPOs
Banks have recently been financing LPO’s. Banks like national banks, Diamond trust bank, and KCB, etc. have been on the rise to fund local purchase orders. Banks can mostly finance LPO’s from 10,000.00 to 5,000,000.00, there is up to 15% of interest with this.
Bank loans have some eligibility criteria and restrictions such as having a positive credit history or to run an account with them for about 6-8 months. Sometimes businesses are not able to meet these requirements.
There are some requirements and qualifying criteria a bank needs before getting into a purchase order financing agreement.
- You need a valid local purchase order from the government ministry, a reputable company, listed KCB list or Ngo’s of corporate companies.
- You need to give a detailed list of products of purchase from the distributor or supplier.
- You would need to submit the bank statements for the past six months.
- You need to show permit documents and valid business registration.
- You need to put forward the valuation and quotation report wherever it is applicable and required.
- A list of completed contracts and assignments in the past, the amounts, the dates, etc. needs to be shown.
- The aged analysis of the creditor or the debtor, the rates and fee structure is one criterion.
OTHER INSTITUTIONS SUPPORTING LPOs
Banks are not the only option that finances LPO’s; there are other microfinance institutions as well. The faulu Kenya and the Kenya women finance trust are some good examples of establishment that can offer loans and funds if you have shares and are a member of them.
You may not be able to apply for one as a business unless you are working as a sole proprietor. A sole proprietor does not require any consultation while making any decisions; they are the only decision-maker. A sole proprietor will be accountable for their actions.
There are organizations like indo Africa finance and the youth enterprise development fund that offer loans and funds for LPO finance. This does not need any kind of security and may take time to process.
You should also consider getting funding from private investors like sharks or shylocks. These lenders may charge 15% of interest every month. You must ensure to calculate and figure the amount of the interest rate you will collect against the profit you will make since you will be paid after ninety days to know for sure with what amount you will have by the end.
Sharks can be very expensive and getting involved with them may risk your business because you might receive less profit or make no profit at all.
Another important solution for all your LPO financing requirements can be solved with invoice factoring. Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring.
Momentum credit offers up to 85% of the value of the invoice and give cash very quickly. You do not need to fill tons of paperwork or open an account with them. Momentum credit does not require your past credit history like other financial institutions. Collateral and other physical assets are not required as well.
There are four kinds of purchase orders. Starting with we have the standard purchase order, this is the order from the buyer to the seller of the item and goods when you are sure about the details of the order like the delivery date.
Then there is a contract purchase order, it can be used when the use of the goods and products by the business differs with time. It can be used for a particular period of time, like one year.
Blanket purchase order can be used in circumstances in which the good or product which has to be purchased is known but the quantity of the product is not known.
Lastly, there is a planned purchase order. This kind of order is used when all the details are known except the delivery date.
An LPO template usually contains the details of the buyer’s name, purchase order number, vendor number, purchase order date, the product that needs to be delivered, the quantity of the product, delivery date, the price per unit of the product, terms of payment and billing address.
Purchase order financing gets simpler with local purchase orders. It keeps your business healthy and in good shape. You must need to understand the details and terms of LPO’s if your business requires it.