Document 6438888

Transcription

Document 6438888
Purchase Order Finance
What is Purchase Order Finance?
Purchase Order Finance (POF) is a transaction-specific form of working capital/trade financing. It is a loan or
advance, secured by a purchase order or contract, to pay for inputs, raw materials, packaging, goods for resale, etc.,
needed to produce and ship a product or deliver a service. It is not a traditional term loan or line of credit for the
general operations of a business. When done properly, POF can be profitable and safe for the lender, enable
companies to grow rapidly, and increase sales, exports, profits, and employment. Companies only pay interest for
the exact number of days they need the advance, not a single day more. POF is an incredibly flexible instrument and
can be tailored and adapted to the country, lender, value chain, types of orders/contracts, the borrower and the
borrower’s customer(s).
How does Purchase Order Finance work?
A typical Purchase Order Finance transaction works this way:
1. A company obtains a verified purchase order or contract from a customer.
2. The company estimates the direct costs (e.g., raw materials, packaging, goods for resale, labor, shipping, insurance, etc.) required to produce and deliver the product or service.
3. The company approaches a lender about financing using the contract as collateral.
4. The lender reviews the order, the cost breakdown and the company’s operating record.
5. The lender evaluates the creditworthiness of the customer that
issued the purchase order and assesses whether the company can
deliver according to the terms of
the order/contract.
6. If the loan is approved, the
lender advances a percentage of
the total order value to enable the
company to produce and ship the
order (or deliver the service) and
issue the invoice to the customer.
7. The invoice (accounts receivable) is assigned to the lender, so
that payment on the invoice is
made directly to the lender.
8. When the customer pays the
invoice, the lender is repaid the
principal, interest and any fees and
remits the balance to the company.
9. This cycle can be repeated over
and over with new purchase orders
to dramatically increase the sales
of the company.
Copyright © Crimson Capital Corp. 2011
COMPETE PROGRAM 123 Gardenia Road, Gigiri, Nairobi, Kenya
Phone: +254-20-421-2000, Email: info@competeafrica.org, Website: www.competeafrica.org
Case Studies in Purchase Order Finance
POF has been used in the United States with
great success and in recent years has been introduced in emerging markets such as Armenia,
Azerbaijan, Bolivia, Kosovo, Macedonia, Moldova,
and South Africa, both through banks and specialized non-banking financial institutions.
Coffee Sector Financing in Bolivia
In 2008, a rural coffee producer association representing 260 members received an order from a
Dutch company for 19.6 metric tons of organic
Arabica. The association and the Dutch buyer
agreed to a price of US$ 55,664 ($2.84/kg); however, because the association lacked the financial
resources to fill the order, they were unable to
commit to the contract.
With technical assistance and training from the
USAID-funded Rural Competitiveness Activity FIE
FFP, a private Bolivian microfinance institution,
provided a US$ 30,000, 90-day (period to produce
and ship the order and for the customer to pay)
working capital advance to the association
through a POF loan. These resources were used
to process the coffee and cover other preshipment expenses, allowing the association to
take advantage of this opportunity. The association assigned the invoice to FIE FFP along with an
invoice from a previous export and a portion of its
savings deposited at FIE FFP. No other fees or
traditional collateral – such as real estate or mortgages – were needed to finance this operation.
The export was a huge success for the association and its members and the loan was repaid on
time when the Dutch company paid the invoice.
According to the cooperative’s manager,
“Purchase order financing allows us to use our
own product to collateralize exports and fill more
demands. This is a real innovation, a financial
facility that ultimately benefits all our members.”
Based on the success of this initial transaction,
FIE FFP rolled out POF throughout Bolivia, expanded the product to other sectors such as palm
heart, cocoa, pineapple and banana, and financed
242 transactions worth over $2 million.
Pharmaceutical Value Chain Financing
in Armenia
In 2010, a privately held pharmaceutical manufacturer in Armenia needed working capital to fill export orders to Western Europe and the Former
Soviet Union. However, the company rented its
facilities and therefore had no real estate collateral, only some equipment and raw materials.
This was not enough to secure the additional bank
financing needed to fill these orders. Without financing the company would not only lose these
orders but also the customers.
The USAID-funded FS Share project helped INECOBANK develop and introduce a POF product,
and the bank approached the company promoting
POF to finance its export orders. For an order
from a Kazakh customer, INECOBANK provided
an advance to the company of US$ 10,000 for five
months (transaction cycle to payment of invoice).
A second POF loan in the amount of US$ 17,000
for six months, used to procure inputs, was secured based on an order from another Kazakh
importer. According to the company’s financial
director, POF provided critical financing when it
was needed most – pre-shipment upon receipt of
the order, which enabled the company to procure
raw materials, packaging, etc., and prepare and
ship the order. Before POF, the company had to
frequently turn down business because its line of
credit was fully utilized and it couldn’t otherwise
obtain more financing. In 2010, the company increased its sales by 30%.
Launching Purchase Order Finance in
East Africa
USAID COMPETE, through a competitive tender, will
select at least two banks in East Africa to participate in
its program to develop and launch Purchase Order
Finance for increasing regional and international trade.
POF is particularly well suited for the development of
the cotton, textiles and apparel industry in Africa, where
access to working capital financing with tenors that
match the specific requirements of the orders is severely needed.
For more information on Purchase Order Financing or
the East Africa launch please contact:
Ramiro Ortega Landa: ramiro.ortega@crimsoncapital.org
or Chris Donohue: cdonohue@competeafrica.org
COMPETE PROGRAM 123 Gardenia Road, Gigiri, Nairobi, Kenya
Phone: +254-20-421-2000, Email: info@competeafrica.org, Website: www.competeafrica.org