What is Purchase Financing?

Purchase financing is raw-material procurement, with the help of an external source that makes payment for the purchase order. In this scenario, the external source is a third party which is usually an NBFC that makes payment basis an approved business loan or credit line. Despite being a fairly new concept, purchase financing has grown tremendously in the last few years after witnessing its benefits for the SMEs.

Problems faced by SMEs

Small and medium-sized businesses are often pulled in to the vicious cycle of delayed payments. This results in limited cash-flow in their system for raw-material purchase. Purchase financing is targeted to eliminate the problems faced by growing SMEs; of difficulty in procuring the raw-material due to limited working capital availability. Accordingly, NBFCs have designed unsecured business loans and credit lines to meet short-term requirements of SMEs, without demanding any collateral. A lot of SMEs are also first time entrepreneurs. They try and manage all the functions single handedly for obvious reasons, but due to the lack of expertise especially in financial matters, they end up overshooting their on paper budget in the real life action mode. This further can disrupt their inventory buying cycles and taking care of other monthly operational expenses like infra running cost and employee salaries etc. Let’s say, they pass this early stage and mature to manage these finances well in some time after their learning cycles. Once they in the second stage which is the growth stage, they do have the command on their finances, but now they need more working capital to grow their business further. At this stage, it’s very important to have help coming in the form of purchase financing from institutions like NBFC or even the new set of companies like Oxyzo offering unsecured business loans.

Features of Purchase Financing

NBFCs are trying to solve this problem by letting SMEs raise working capital for bulk raw-material purchasing. Some of the key-features of purchase financing include:

1. Easy Access – Unsecured business loans and credit lines offered by NBFCs for purchase financing are easy to access, and offer quick solutions for short-term operational requirements.

2. Quick Capital Arrangement – Unsecured business loans or credit lines required for purchase financing are typically approved within 3-5 days of document submission by NBFCs. This is helpful in raising capital at short notice and prevent any operational delays. Most of the SMEs face last-minute working capital issues due to limited planning and management. Thus, purchase financing is helpful in keeping the company running seamlessly without any hassles.

3. Collateral-free – Purchase financing was introduced mainly to help solve raw-material shortage problems of emerging SMEs. To prevent sudden operational delays, SMEs with limited or no collaterals can opt for purchase financing as it does not require a loan. Credit lines offered by NBFCs are specifically designed to offer best price and quick approval in addition to offering access to collateral-free capital.

4. Working Capital up to 2 Crores – NBFCs offer working capital of up to 2 Crores for purchase financing. Credit lines offered by Oxyzo require SMEs to pay interest only on the used amount and only for the time period that it was used. This is helpful for SMEs looking for short-term budget solutions.

Benefits of Purchase Financing

1. Better material costs – Purchase financing gives power to SME’s in the sense that it offers ready cash to SMEs and thus help SMEs negotiate better with the supplier by offering on-the-spot payment and save on interests. SMEs can save up to 3% on bulk raw-material purchasing, if negotiated well.

2. Savings on interest payouts – NBFCs charge an interest-rate of ~1.4-1.6% per month on the used amount and for the used period. This interest-rate is 1% per month lower, when compared with traditional lenders. Thus, SMEs using purchase financing for bulk raw-material procurement can also save on interest payouts of up to 3% over a period of 90 days.

3. Wide range of products – NBFCs are also helping SMEs procure bulk raw-material at competitive prices from their strategic partners. This is helping SMEs source quality raw-material for their business and get it delivered to any location in a hassle-free manner. OfBusiness offers bulk raw-material purchasing for TMT, steel bars, polymer, textile, cement etc.

Purchase financing is a strategic solution for SMEs to ensure smooth operations and minimize production delays. The idea has evolved over the past few years and is certain to grow more with the humongous opportunities being offered to SMEs. From savings on interest payouts to better sourcing, purchase financing offers it all-in-one.

If you are an SME, interested in getting working capital, please feel free to reach out to us at 1800-102-9586 or mail to contact@ofbusiness.com.