Step-by-Step Guide to Applying for Purchase Order Financing

In the Blog Post

MSMEs typically lack sufficient funds to undertake larger orders and engage in international trade. This is where purchase order financing enters. It enables a business to take large orders on exports or within the country without the need to rely on working capital. When it comes to PO financing, clarity, documentation, and planning are all vital in order to apply. This guide takes you through the whole process, step by step, so you can go to your financing partners with confidence.

What is Purchase Order Financing

Purchase order financing is a funding solution that funds against purchase orders when your supplier transfers the costs of fulfilling a customer’s order. When the seller delivers the products and the customer makes payment, the financier recovers repayment (including commission) and then remits the balance to you. Contrary to conventional loans, PO financing has certain advantages, thus making it advantageous to exporters and growing MSMEs that have large purchase orders.

Why MSMEs Opt for PO Financing

Before discussing the steps, it is vital to know the reasons why MSMEs decide to use purchase order financing instead of other available options –

There is no need for collateral—financing is done based on the credibility of the purchase order.
It fills the gap of working capital at a time when there are minimal protective cash reserves available
Viable to be used by MSMEs to accept large and repeat orders from both domestic and international buyers.
Keeps the suppliers in good standing through timely payments

Here is the step-by-step application process.

Step 1- Evaluate Your Eligibility

Before applying for Purchase order financing, MSMEs are advised to ensure they fit before applying. The lenders normally inquire about –

A valid purchase order from a reputable customer.
The capacity to deliver quality products at the due time.
A reasonable profit margin with the costs of financing included.
No major past credit defaults.

By just being aware of these requirements, MSMEs would not lose their application upfront.

Step 2 – Collect and Organise Required Documents

Just like other financial instruments, PO financing is also associated with documentation. It is worth preparing the following in advance –

Valid and signed purchase order of the buyer.
Quotations or invoices supplied by the Supplier
Company financial statements
Licenses and business registrations.
Past order track record (where available).

The availability of everything in order indicates that your business is reliable and professional.

Step 3 – Choose the Right Financing Partner

The choice of a partner should be taken seriously as the purchase order financing providers vary with fees, flexibility, and processing time. Banks follow a conventional process, whereas fintech platforms and NBFCs have a quicker decision-making process and less documentation. Always compare –

Interest rates and financing charges
Speed of approval.
Specialisation in the industry.
Reputation and customer care.

A desirable financing partner makes the whole process easy

Step 4 – Submit Your Application

Once you select a partner, proceed to submit your PO financing application. This involves filling out –

Business details.
Supplier and buyer information.
Order amount and the scheduled day of delivery.
The amount requested to be financed

Attach all the supporting documents so that they can be verified faster.

Step 5 – Verification and Final Approval

Upon submission, there is a process of due diligence undertaken by the financier. This includes –

Checking the legitimacy of the purchase order.
Looking at the past payments of the buyer.
Revamping the reliability of your supplier.
Evaluating the trade record of your company in the past.

Approval depends more on the buyer’s credibility than yours–making it ideal for new exporters.

Step 6 – Financing Agreement and Terms

The financier would send an agreement with the following terms, in case it is accepted.

The percentage of PO financing (usually being 70-90% of the PO’s worth).
Rates or interest charged
Repayment timeline.
Rights and duties of both parties.

Go through the financing agreement and read it well before signing it. Small hidden costs will eat into your profit margin.

Step 7 – Supplier Payment and Order Fulfilment

When an agreement is approved, the financier transfers money to your suppliers. This will ensure the production and shipment are timely. Here, your job would be to liaise with the supplier to facilitate seamless order delivery as well as to ensure the goods are according to the specifications of the buyer.

Step 8 – Delivery of Goods and Invoice Submission

After the goods are produced, they are transported to the consumer. The exporter should then file –

Delivery proof – bill of lading, airway bill, etc.
Invoice to the buyer.
Confirmation message of receipt to the buyer.

Such documents play an important role in enabling the financier to keep track of the transaction.

Step 9 – Buyer Payment Collection

Upon the receipt of the goods by the buyer, they pay the financier (as per agreed terms). The financier then withholds their fee and hands over the rest to you. This exercise protects repayment and minimises the credit risk of the MSMEs.

Step 10 – Build Long-Term Financing Relationships

After you have effectively made a transaction through purchase order financing, make use of the experience to develop long-term trust with the financier. This may assist in –

Get a better finance amount in future deals.
Enjoy quicker approval if it is a repeat order.
Access supplementary facilities of finance, such as factoring or invoice discounting

Turning Purchase Orders into Growth Opportunities

Purchase order financing is not limited to filling the funding gap; it is all about creating growth potential. With the adequate application procedure and a reliable partner, MSMEs can meet large orders, explore new markets, as well as enhance relationships between the suppliers and buyers. With the help of an appropriate strategy, every purchase order can be implemented as a stepping stone to long-term success.

Credlix provides simplified purchase order finance approvals, competitive rates, and dedicated support to the MSMEs and exporters who want to take reliable purchase order finance. Digital-first processing eliminates delays and complex paperwork. SMEs can work on larger orders, expand their businesses, and compete internationally with confidence through Credlix.