How to build a purchase order financing solution and its efficacy in boosting B2B commerce

Shamolie Oberoi   /    Content Marketing Specialist    /    2022-10-11

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Healthy credit access is the fertilizer in which a business blooms. Even Jeff Bezos got a USD 245,000 loan from his parents for an early internet business venture. But unfortunately, most business owners don’t have the luxury of wealthy parents to fall back on.

That’s where formal and personalized credit products come into play. From cash flow-based lending to merchant cash advances, there are different lending solutions that address business’ working capital needs and allow them to fulfill orders without disrupting cash flow and business as usual.

In this piece, we’re talking about one such solution - purchase order financing (POF) - and its benefits to both businesses and e-commerce platforms that tend to aggregate these businesses.

What is purchase order financing?

POF is a commercial financing option that allows suppliers to be paid upfront for verified purchase orders. While traditional supply chain finance methods fund an invoice (and therefore only the payment terms), funding a purchase order reduces financing costs and friction across the whole chain.

Here’s a snapshot of how POF works

  • A business receives a purchase order from a customer - it should specify the type and and volume of goods to be purchased

  • If financing is needed, the businesses consults its supplier to estimate costs involved for the ordered goods

  • The business then applies for financing after estimating and confirming the involved costs. The lender will typically approve financing for up to 90% of the total cost

  • The lender pays the supplier based on the POF application. The supplier then has the funds to begin work on the order

  • The goods are delivered to the customer. The business then invoices the customer for the fulfilled order

  • The customer makes the payment towards the POF lender

  • The lender deducts their fees(essentially the interest on the amount lent) and forwards the business the remaining sum of the proceeds

Why this is the right time to build a digital credit offering

India is among a handful countries that boasts a robust public infrastructure, which has made it possible to build solutions like UPI and Account Aggregator that are transforming both payments and credit respectively. Now, the Indian government is doubling down on its push for digital finance products, specifically targeted towards MSMEs. 

This, alongside the boost in digitization led by the pandemic, has created an enabling environment for platforms looking to offer B2B digital credit solutions such as POF. However, as seen from the process above, a solution like POF involves several complex processes and multiple moving parts. Building this in-house requires massive financial and human resources, to say the least.

The cost and time-effective approach would be to partner with a FinTech that specializes in digital credit infrastructure. They can provide easy-to-integrate APIs and SDKs that can drastically reduce your new offering’s time to market.

What are the benefits of POF for businesses?

  • Since suppliers are paid directly by the lenders, businesses don’t have to worry about acting as middlemen in the processes

  • The inflow of credit allows businesses to take orders they may not have been able to fulfill otherwise due to emergencies or a cash crunch

  • While finding the right financier may take time initially, the process be becomes faster and more simplified once a relationship has been built

  • It’s relatively easier to qualify for purchase order financing even without a comprehensive credit history and immovable collateral

Why should B2B E-commerce platforms offer a POF solution?

Let’s take a current example of festive-season sales. Purchases skyrocket during this period (for example, at the time of writing, 60-70 lakh mobile phones have been sold within the first four days of major e-commerce players kickstarting their festive sales).

Merchants thus need to up their inventory in order to match increasing demand, and the e-commerce platform places early orders inventory. In order to facilitate this, the platform itself can offer purchase order financing to enable merchants to procure the volume of products needed. It’s a win-win situation for both parties involved.

Other benefits to the platform include:

  • Increased conversion rates and thus, higher revenue

  • Higher average order values

  • Streamlined user experience

Building one’s own POF lending solution involves creating several layers as part of a lending stack:

  • A lender network that will provide the required capital 

  • A KYC suite that should enable user authentication through Aadhaar, PAN authentication, bank account validation etc

  • An underwriting suite built on both traditional and alternative data points for accurate risk assessment

  • An automated collections solution to recover loans with relevant nudges and communication

If you would like a faster and easier way to begin offering POF to merchants, get in touch with us at FinBox - our end-to-end lending infrastructure will have your POF solution up and running in no time! Contact us here.