Purchase Financing Explained

An order is confirmed and the stock has to be procured. Funding it outright would exhaust the cash position, leaving the choice between under-buying and declining the order. Purchase financing exists to remove that trade-off.

How the facility operates

The defining feature of purchase financing is that funds are not released to the borrower. Settlement is made to the supplier.

• The order is placed with the supplier in the ordinary course.
• Settlement for the goods is made directly to that supplier.
• The supplier releases the stock.
• The stock converts to sales, and the facility is repaid.

No outlay is required from the borrower ahead of receipt. The supplier is settled to terms, the stock is delivered, and the capital that would otherwise have been committed remains available to the business.

The case for volume procurement

Most suppliers price on volume. A full container attracts one rate; a quarter container, constrained by available cash, attracts a materially worse one on every unit, indefinitely.

Businesses procuring in small lots absorb a permanent premium on input cost. The lower-cost alternative requires a substantial payment ahead of any receipt, which is precisely the constraint. Purchase financing removes it, and in many cases the margin recovered on input pricing exceeds the cost of the funding.

What is assessed

• The order. Whether it is firm, documented, and placed by a buyer whose acceptance carries weight.
• Capacity to perform. Purchase financing carries performance risk that invoice discounting does not, since the goods have not shipped. The record of fulfilling orders of comparable size is material.
• The buyer. Their standing, and their settlement history against prior invoices.
• The supplier leg. The party being settled, the terms, and the supporting documentation.

Distinction from invoice discounting

Purchase financing sits ahead of the sale. Invoice discounting sits after it. The first settles the supplier so procurement can proceed; the second advances against a receivable already created.

Most growing businesses draw on both across a single cycle: purchase financing to secure the material, invoice discounting to bridge the period once the goods have shipped and the invoice has been raised.

Risk considerations

Because nothing has shipped at the point of settlement, the exposure is greater than on an invoice for goods already delivered. Purchase financing sits at a higher risk tier as a result and is assessed more closely, particularly on first orders, unusually large orders, or buyers not previously supplied.

Set against that, declining a profitable order because capital was committed to the prior quarter’s receivables also carries a cost, though one that never appears on a statement.

General information only, not financial advice. Structure, advance rates and charges depend on the final terms of the facility offered and are subject to credit assessment.