Purchase Order Financing Guide in Nigeria

Purchase Order Financing Guide in Nigeria

Everything You Need to Know About Purchase Order Funding & Financing in Nigeria.

If you are a small business owner in Nigeria with a purchase order and considering financing, or if you are just trying to learn more about purchase order financing while researching many different options for getting additional funds for your small business, you’re in the right place.

In this guide, we cover everything we’ve ever wondered or been asked about purchase order financing, and then some. Read on to learn:

What is purchase order financing?

Purchase order financing is a short-term financing method that businesses can use to cover the cost of manufacturing or purchasing goods that have to customers via a purchase order.

When a customer has agreed to buy a certain quantity of something from a supplier at a certain price point, they usually send over what’s called a purchase order. If you’re a small business owner and you receive a purchase order and agree to the terms on it, that purchase order document becomes a legally binding contract between the two parties: you and the buyer.

Sellers send out invoices to their customers, and buyers send out purchase orders to their suppliers.

While it’s amazing when your business gets a large purchase order, not every company has the liquid cash to fill the order, the last thing you want is to turn down the offer.

It's just not a good experience, we have all been there. 

What is Purchase Order Financing?

A purchase order, or, “PO financing” is an arrangement where a third party agrees to give a supplier enough money to fund a customer’s purchase order.

In some cases, purchase order loans will finance an entire order while in other cases they may only finance a portion of it. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. After subtracting their fees, the company then sends the balance of the invoice to your business.

Suppliers would probably prefer it if they never had to worry about financing large purchase orders. Unfortunately, that’s not always the case. The good news is that by using PO loans to fund purchase orders, suppliers can fulfill their customers’ needs while continuing to grow their operations.

Startups like Bridger, are willing to fund suppliers even if they have less-than-ideal credit scores.

What matters more is the creditworthiness of the business than sending the purchase orders,  and if you are a small business in Nigeria, PO financing may be just the solution you need.

Who Uses Purchase Order Financing?

If you find that you need to purchase items from suppliers before fulfilling a customer order, then purchase order financing might be a good option for you. Typically, the types of businesses that might use PO financing include:

  • Distributors
  • B2B businesses
  • Outsourcers
  • Resellers
  • Wholesalers
  • Businesses with heavily seasonal sales patterns
  • Businesses with tight cash flow and a need to purchase materials before fulfilling orders

How Does Purchase Order Financing Work?

Let’s say a customer places a large order. After checking with your supplier, you realize you don’t have enough cash on hand to fulfill the order. You review your options and ultimately decide to give purchase order financing a try.

Here’s what happens next:

  • You reach out to the PO financing lender, sending along the purchase order itself and your supplier’s estimate.
  • Assuming a provider approves you for financing, the provider pays your supplier and your order gets filled.
  • The supplier sends the products to the customer.
  • You then invoice your customer for the goods.
  • The customer sends their payment directly to the financing company.
  • After deducting their fees—which can be as high as 4% each month—the financing company sends you the remaining balance.

How to Apply and Qualify for Purchase Order Financing

Applying for purchase order financing using a stable reliable platform can be smooth. After doing your due diligence and finding the provider you’d like to partner with, you’ll generally have to submit several documents, including:

  • The purchase order from your customers
  • Your supplier’s invoice to you
  • Your invoice to your customer
  • Your purchase order to your supplier
  • Business Information
  • Legal information (e.g., any pending lawsuits?)
  • Financial statements (e.g., P&L statements and balance sheet)

Different lenders have different criteria for approval. On average, however, companies that qualify for purchase order financing usually tend to have the following traits in common:

  • The company (borrower) doesn’t make the products it sells. Instead, it just resells products from the supplier, adding its packaging and labeling.
  • The customer involved in the deal needs to be creditworthy. PO financing lenders will conduct a detailed credit check on your customers to determine their creditworthiness. Some lenders will do a business credit check on your customers. Others will not, but they will still look for things such as whether the customer has a record of timely payments, bankruptcies, or litigation.
  • The supplier needs to be reputable with a track record of delivering orders on time, made to customer specifications.
  • The transaction needs to be non-cancelable.
  • The borrower needs to have a good reputation and be in good financial standing.

Assuming your small business meets the above criteria, you may find that purchase order financing is just what you need to get to the next level. 

Pros and Cons of Purchase Order Financing

Some Pros of Purchase order financing.

  • Helps you fulfil large buyer orders
  • Helps young and established businesses.
  • Easy to qualify for.
  • Support different parties in the supply-chain process

Some Cons of Purchase order financing.

  • You will have to let go of some percentage of your profits.
  • Your ability to get this financing might be affected by the creditworthiness of your buyer

Some other options to Purchase Order Financing in Nigeria.

There are other financing vehicles you can use for your business, see some of the common ones below.

Invoice Financing is a form of small business funding where companies borrow against their outstanding invoices instead of selling them to a factor. Companies that go this route can partner with a lender like Bridger and choose which invoices they’d like to advance payment on, up to the approved credit limit, whenever they need cash. Once they’ve chosen which invoices to clear, they can get the full amount of each invoice in as fast as one business day. They then have a predetermined amount of time to repay the advance, plus a flat fee. Unlike factoring, invoice financing enables you to overcome cash gaps without your customers becoming aware of your financial situation because they continue paying you directly.

Traditional Term Loans are also very viable for small businesses.

However, fewer and fewer banks are funding a small businesses. Data says Nigerian banks only sign off on one out of six small business loans that come their way. Most of them prefer to lend to larger organizations that have spectacular finances and perfect credit scores. Still, some banks will fund the right small businesses. It will take a lot of time to apply and, if you’re approved, you may have to wait several weeks or months for the money to finally come your way.

Loans From Non-Bank Lenders have emerged in recent years as a vehicle to finance the small businesses banks have forgotten. While it’s easy to qualify for these kinds of loans and the application process isn’t cumbersome, they often come with substantially high-interest rates. 

Outside Investors can also help. You have to be willing to let go of ownership of decisions and profits. The right investor and you’ll benefit from someone who knows what they’re doing and has a lot of connections that can help your business grow.

Are you looking for ways to get funding for your small business? Do you need to purchase order financing or Invoice financing to help you manage your cash flow issues, or grow faster? If you do, you have come to the right place. We're here to help.

Sign up on Bridger today so you can conquer any cash flow problems your small business may face tomorrow.

Subscribe to our newsletter

Thanks for joining our newsletter
Oops! Something went wrong while submitting the form.