Purchase finance is a flexible and non-traditional form of business financing for small businesses to obtain business credit. They provide immense benefits to those businesses that have a need to reach goods to customers on time. Examples of businesses that can use purchase finance are those who trade in clothing, toys, non-perishable goods, jewellery, finished consumer goods, etc. The facility can be fruitfully used by importers and exporters, wholesalers, retailers and manufacturers.
Purchase Finance – How Does It Work
When a business needs to pay for purchasing raw materials in advance, finance companies offer a type of bridging loan. A business that is interested in procuring this type of finance sends order details, supplier finance requirements, etc., to the selected finance company. The finance company pays the supplier for the goods that are ordered according to specified terms. The business then receives the raw materials/goods on time from the supplier.
The finance company enters into a mutually agreed-upon credit term with the business. The amount finance received is then repaid by the business according to a mutually agreed-upon finance charge on a specified date/over a period of time.
The finance company does not buy stock or invoice the customer. Most companies also do not even insist on any minimum values of transactions on an annual basis.
Purchase Finance – Charges
The finance companies generally charge on a monthly basis. Disbursements are charged at cost. The financing charges may vary among different companies. They are dependent on the volume and size of the transactions and for the period of time that the arrangement is open.
The financing charges are usually higher than the interest on bank loans.
Purchase Finance – Advantages
The most obvious advantage of purchase finance is the reassurance that comes with knowing that there is an option in addition to the existing finance facilities. Whereas it is difficult to get loans from traditional lending houses for businesses to stay afloat, purchase financing comes to their rescue.
It helps to improve cash flow. The business can carry on its activities with peace of mind with the knowledge that the supplier has already been paid off.
This method of finance can be used to fund additional purchase that may be required to take the business to the next level. It can also be used when there are seasonal peaks or sudden large orders as well.
Finance companies encourage prompt repayments according to schedules with discounts. This improves the purchasing power of the business.
For a business to obtain this form of funding there is no requirement that the goods need to be pre-sold. Raw materials required for manufacturing are not precluded either. This makes it an option that can be flexibly used according to the current requirement of the business.
It is a completely confidential service. There is no need to let the client or bank know about these finance transactions of the business.
However, purchase finance is not usually made available for start-up companies, businesses on the brink of insolvency, and those companies that are already running on a loss. The chances of a business obtaining credit are potentially lowered if the company has been summoned to court over non-payment of debts.