Ultimate guide to local purchase orders and local purchase order financing

For many businesses, the last thing they need is more paperwork especially the local purchase orders. Most of the time, it just looks as if all the documents and files complicate things a lot more than they simplify the workflow. For this reason, they just overlook the importance of using local purchase orders, and ignore them all the same.

Don’t local purchase orders just say the same thing as invoices? On the contrary, these are two different documents, both of them important in their own right. As a matter of fact, you will find that verbal or email commitments are merely enough for your business and local purchase orders are so much more than the order itself.

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What is a local purchase order?

A local purchase order, or an LPO is a document sent from a buyer to a supplier requesting an order of supplies. Listed on the document is the name of the company buying the goods, an LPO number, the date of the order, the invoice address, type of goods, the quantity of the goods and the price for those goods or services. The more specific you make your order, the more the details that will be included, and the more effective it will be.

When the seller, (in this case the supplier) accepts the order, it serves as a legal binding contract between them and the buyer. The buyer must always be clear and explicit about their requests to the seller when they send the order. Local purchase orders are technically the legal binding contract between the two, and with that document in hand, negotiating the terms is a lot easier.

One of the best things about an LPO is the fact that in the event the buyer refuses to pay, the seller will be protected by the document. The next best thing is that some commercial lenders use local purchase orders as a reference when providing financial assistance to a business.

What is the difference between an LPO and an invoice?

Buyers draft purchase orders, while sellers prepare invoices. Sometimes invoices are send after the payment has been made, and other times they are issued with a payment due date. Both documents normally contain similar details, and they correspond to each other. The invoice usually references the LPO number to show that they correspond. The major difference between the two documents is the technical details in the purchase order that do not appear in the invoice.

What makes local purchase orders so important to a business?

Most businesses forego the use of purchase order because they have an established working relationship with suppliers or simply because they feel the paperwork is too much of a hassle. However, even with good relationships between a seller and a buyer, there could be communication challenges in the event that certain details of an order are incorrect, or the goods delivered are not at par with the requirements.

When this happens without an LPO to reference, it could be very challenging for both parties to come to an agreement and discover where the order went wrong. LPO’s serve as the concrete paper trail businesses can reference to when things go wrong.

Types of local purchase orders

There are three main types of local purchase orders, which are:

Electronic: Most companies tend to use electronic purchased orders

Single use: Most of the time, these are used in retail stores. Single use purchase orders keep track of a single order, and once all the goods on the order are delivered, the LPO number can no longer be used.

Blanket: Blanket purchase orders are normally used by organizations. They keep track of all the money that was spent by a particular department or in a particular project. Blanket LPO’s also serve the purpose of limiting spending during a specific project or timeframe.

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The process of a local purchase order

There are several stages involved in a local purchase order process. They vary from business to business other, but listed below are some of the most common.

• The creation of a purchase requisition
• The purchase order is sent
• The supplier approves the order
• The buyer records the order

What do local purchase orders look like?

Local purchase orders are standard documents. Below is a local purchase order sample that we have included, and as you can see, they include the vital details of a purchase. An LPO sample contains the company information, shipping details, the vendor information, order information, and other vendor details. Most businesses tend to use documents with stock information in order to maintain consistency.

What is local purchase order financing?

LPO financing is a commercial finance option for businesses to pay suppliers upfront for verified orders. When a business is having problems in filling orders, they can use those purchase orders as collateral to get financial help to pay the suppliers. This is referred to as purchase order financing. It is usually a great financing option for small and medium sized businesses when they have a temporary cash flow problem.

How does local purchase orders financing work?

LPO financing can be an ideal solution for filling out outstanding orders when a business is having cash flow problems. Businesses use the purchase orders as security, and the lender pays the supplier on their behalf. Once the supplier delivers the goods to their clients and clients make payments, the money goes to the financial lender, and the supplier takes the profit. This makes it easier for suppliers to fill in orders and take in more work even when they don’t have the money on hand.

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Local purchase order financing process

• A business receives a purchase order from a client
• The business applies for funding from a lender using the order as security
• The lender verifies the LPO with the client
• After confirmation, the lender gives money to the supplier
• The supplier ships the goods to the client
• The client pays the lender
• The lender sends the profits to the supplier

How to compare LPO financing in Kenya?

There are several factors a business needs to consider while comparing LPO financing lenders in Kenya. Listed below are some of the most important ones.

Verification- The LPO lender will be taking a risk by financing the purchase order. This means that they will need to verify the order with the customers and suppliers.

Lending criteria– There are alternative LPO lenders so business don’t need to entirely depend on banks to do it. Check what the lending criteria are before you come to an agreement. Of course, some banks can be good lenders too. NIC bank loans for instance are usually a good option in the country.

Short term– LPO financing is a short-term solution, meant to ease the process of receiving orders and collecting profits when customers make payments. When a business requires a larger loan however, it is usually better to explore other options suited for larger needs.

Maximum Amount– The maximum amount a business can get from a lender usually depends on the lender, the size of the purchase, and the businesses’ capacity to fill that order. Some lenders have a maximum and minimum loan amount, so businesses need to do some research before you make a decision.

The benefits of LPO financing

Unsecured financing– The only security a business needs to use when getting LPO financing is the purchase order itself

Safe– The lender will cover all the bases before they actually approve the financing. This will include the validation of the authenticity of the order from the customers and suppliers. The funding is sent to the supplier, who in turn sends the goods to the customers.

Simple process– LPO financing is an easy process with fast approvals, which makes it easy to supply goods.

The drawbacks of LPO financing

Short Term– LPO financing is a short-term solution for businesses, but it does not serve as a solution for large financing problems.

Covers finished goods only– LPO financing is only used for finished goods.

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What to watch out for during local purchase order financing?

Product inspection

When the goods are delivered to the customer, they will do an inspection of what they received. It is of utmost importance that the goods match the LPO and everything is correct. A wrong delivery will reflect badly on both the lender and the business.

Risk

Before applying for LPO financing, a business needs to ensure that they can fill that order. If the business fails to deliver on the order, they will have a hard time qualifying for financing in the future.

Where businesses can get local purchase order financing?

There are very few LPO financing companies in the country. In general, there are two types of financing institutions that offer businesses LPO financing options, which are:

Banks

Most traditional banks don’t advertise LPO financing, but most of them offer it as an add-on service to their long-term customers. If a business is already in a relationship with a bank, they can find out of that bank can offer them LPO financing. It is possible that such a bank can offer a good LPO deal than a new bank.

Loan Providers

There are other types of financing institutions that offer AR financing, and other lending solutions. These institutions could also offer LPO financing, and if they do so, they do it at varying rates.

What to look for in a local purchase order financing company?

When searching for the best LPO financing company, a business should consider several factors before they decide to make a deal. Here are some of the questions a business needs to ask a financing company to ensure that they are the right company.

• How long have they been in the LPO financing business?
• What loan products do they offer?
• How and when do they pay suppliers?
• Do they pay before or after the customer makes payments?
• Do they pay in cash or a letter of credit?
• What are the costs of the financing?
• How will they receive payments from the customers?
• What kind of background check do they do on the customers and suppers?

With answers to these questions, a business will have a better idea on how the lender wors and whether the loan will be beneficial to them.

Local purchase order financing qualifications

As long as a business deals with reputable suppliers and customers, qualifying for financing can be easy. The most crucial qualification is that the business is a B2B or B2C business selling tangible goods with a profit margin of 15 % or more. The customers and suppliers must also be creditworthy.

One of the things that vary most between lenders is the profit margin, as some lenders might have a minimum of as much as 25%. Being creditworthy means that the customers and suppliers have a trend of timely payments have no serious litigations in the past, and they have no recent bankruptcies.

Local purchase order financing is one of the best short-term funding solutions for businesses when sales outpace their cash flow. However, it can be an expensive solution depending on the profit margins asked by the lenders. This means that a business must consider their options carefully before getting into an agreement. Purchase order financing, albeit a good solution, should always be a last resolution after exhausting all other options.