The Different Types of Purchase Finance Available to SMEs

Small and medium-sized enterprises (SMEs) often need access to short-term financing to cover the costs of purchasing inventory, equipment, or other assets. Purchase finance can give SMEs the capital they need to grow their businesses and compete in the marketplace.

Types of Purchase Finance

There are several different types of purchase finance available to SMEs, including:

1. Invoice Financing

Invoice financing, also known as accounts receivable financing, allows SMEs to leverage their outstanding invoices to access immediate funds. When SMEs face cash flow constraints due to delayed customer payments, invoice financing steps in as a practical solution.

By selling their unpaid invoices to a financing company at a discount, SMEs can receive a percentage of the invoice value upfront. The financing company then collects the payments from the customers, and once the invoices are settled, the SME receives the remaining amount, minus a financing fee.

Benefits of Invoice Financing:

• Improved cash flow to cover operational expenses and seize growth opportunities.
• Reduced dependence on customer payment cycles.
• Enhanced ability to offer flexible credit terms to customers, leading to increased sales.

2. Purchase Order Financing

Purchase order financing is an ideal option for SMEs that receive large orders but lack the funds to fulfill them. In this type of financing, a lending institution provides the necessary funds to suppliers or manufacturers to fulfill the purchase order. Once the order is complete, and the SME issues an invoice, the lender is repaid with the invoice amount.

This financing option allows SMEs to capitalize on lucrative business opportunities without depleting their working capital.

Benefits of Purchase Order Financing:

• Enables SMEs to accept larger orders and fulfill them promptly.
• Helps build strong relationships with suppliers and customers.
• Facilitates business expansion and increased market presence.

3. Asset-Based Lending

Asset-based lending is a versatile financing option for SMEs with valuable assets such as equipment, inventory, or real estate. The lender assesses the value of these assets and offers a line of credit based on a percentage of their appraised worth. SMEs can then draw funds from this credit line as needed to support their business operations.

Benefits of Asset-Based Lending:

• Utilizes existing assets to access flexible financing.
• Provides working capital for inventory management and business growth.
• Offers a higher borrowing limit compared to traditional bank loans.

4. Trade Credit

Trade credit is a financing arrangement between SMEs and their suppliers, allowing the SME to receive goods or services with delayed payment terms. This type of financing is based on the trust and creditworthiness of the SME.

Trade credit can be an essential tool for managing cash flow and extending the time between purchasing inventory and receiving payments from customers.

Benefits of Trade Credit:

• Reduces the immediate financial burden of purchasing inventory or raw materials.
• Builds stronger relationships with suppliers.
• Helps maintain healthy supplier-customer partnerships.

Conclusion

Purchase finance can be a valuable tool for SMEs that need access to short-term financing. There are a number of different types of purchase finance available, so you can find the one that best meets your needs. If you are considering purchase finance, be sure to compare rates and terms from different lenders before you choose one.