Micro, Small, and Medium Enterprises (MSMEs) are the major providers of the export economy in India. However, one of their biggest problems has been access to finance. Due to customary banking practices that involve long documentation, collateral, and fixed repayment schedules, the traditional banks are usually cumbersome. Consequently, alternative tools to finance exports have been developed to support the export efforts of MSMEs in their efforts to overcome cash flow constraints and fund exports, including purchase order financing (PO financing), working capital loans, and others.
This blog looks at what sets the two apart, their benefits, and how MSMEs can decide which one to use to accelerate their growth and remain competitive in the global economy.
Understanding Purchase Order (PO) Financing
The essence of PO financing is that a third-party lender or a financial institution advances the suppliers or pays them upfront to complete an export purchase order. This will benefit the MSMEs who get large orders, but cannot afford to purchase and produce raw materials, and ship goods to the customers timely manner.
With PO financing, the MSMEs have more opportunities to work on larger contracts with no fear of working capital shortages. They can seek the help of financiers to cover the liquidity crunch; otherwise, they would be forced to forego opportunities.
Understanding Working Capital Loans
A working capital loan is a more conventional form of finance compared to PO financing. It can provide businesses with funds to run daily operations such as salaries, procurement of raw materials, logistics, and debts.
These advances are normally secured against collateral or by the company’s credit history. Although they offer flexibility in their usage, the repayment terms are normally fixed, which, in some cases, might stretch MSMEs when they fail to meet revenue inflows on time.
Key Differences Between PO Financing and Working Capital Loans
It is essential to have an overview of the differences between purchase order financing and working capital loans before picking one to utilise –
- Purpose – PO finance is linked to the fulfilment of specific export orders, whereas working capital loans can be used for general operating costs.
- Collateral -The PO financing doesn’t often need significant or any collateral, because it is supported by the verified order. Assets are normally required as security in working capital loans.
- Flexibility of Repayments – PO financing repayments are linked to order fulfilment and invoicing of the client to the business, thus making them more flexible. Loans for working capital repayment are scheduled
- Eligibility – Only MSMEs with healthy purchase orders can access PO financing, unlike working capital loans, which are more dependent on credit reports and balance sheets.
Benefits of PO Financing for MSMEs
Exporters are increasingly seeking PO financing as a way to overcome the liquidity issue when demand increases. The principal advantages of purchase order financing are –
- It ensures that MSMEs can accept bigger export orders without worrying about the cash flow.
- There is no need for large collateral; the purchase order confirmed the security itself.
- The payment is balanced with an order payment, which decreases the financial load.
- Timely payment to suppliers to build credibility.
This is a source of financing that is available to the growing exporter who can enter global markets that are used to large orders.
Benefits of Working Capital Loans for MSMEs
Whereas PO financing is specialized, working capital loans are much broader. Their benefits are –
- The funds may be utilised in various ways, such as raw materials and salaries.
- Immediate access to funds for near-term operations.
- Aids in running operations even during a low-revenue period.
- Establishes a long-term credit history with lending institutions.
This option is a perfect choice for MSMEs that require regular liquidity to conduct the business and not funding based on the orders received.
When to Choose PO Financing
SMEs need to use PO financing when –
- They get huge export orders, yet have no advance cash flow to fund them.
- They desire to move into new markets without using already available resources.
- They prefer minimal requirements on collateral
- The buyers are renowned, and this ensures that payments are received promptly.
Such a financing option is suited well to support fast-growing exporters that have liquidity fluctuations.
When to Choose Working Capital Loans
Conversely, working capital loans can be best realised when –
- Business requires periodic money for operational costs.
- They would like the flexibility in the use of funds.
- They either come with collateral or with a good credit record
- They are willing to do structured repayment plans with the banks.
This option can be more sustainable in cases where the operations of SMEs are stable and can forecast their inflows.
Choosing the Right Path for MSME Growth
The PO financing vs the working capital loans debate does not have a one-size-fits-all solution. Both possess different strengths based on the stage of business, financial position, and demand in exporting.
- Order-specific funding with low collateral is best suited for cases of PO financing.
- A working capital loan is well-suited for long-term operational stability.
The final decision determines the combination of the use of financial tools and business objectives. The appropriate financing strategy can make a difference between missed opportunities and growth.
Be it PO financing or a working capital loan, selecting the right partner will be a determining factor. These solutions are collateral-backed financing solutions designed to service the exporters with a seamless process. Credlix offers efficient approvals, online procedures, and repayment terms that are available to help exporters not miss a chance in the global market because of cash reserves. To help MSMEs, Credlix bridges the financing gap and unleashes their growth to compete with confidence in global markets.
