Purchase Order Finance for MSME and Value Chain Finance

For many companies in emerging economies obtaining the finance needed to complete sales, expand production and product lines and increase employment is the biggest challenge to growth. One approach to increasing access to capital for is to provide financing backed by purchase orders. This technique has been introduced by Sibley Consortium team members and proven successful in helping micro, small and medium sized companies in diverse value chains get the finance needed to be competitive in several USAID-assisted countries including Armenia, Moldova, El Salvador, Kosovo and Bolivia. In Macedonia, for example, the SME Finance Fund starting with only $1.5 million to lend, has already lent out over $11 million and generated over $27 million in new exports and dramatically increased the profitability and competitiveness of its clients through the purchase order financing technique. POF is attractive to both lenders and borrowers for a number of reasons: it helps businesses grow quickly, makes it easier to satisfy collateral requirements, provides short term repayment, and promotes credit discipline making them more attractive to banks and MFIs. It enables them to fill larger and more frequent orders leading to growth in sales, profits, exports and employment. For financial institutions, POF allows them to offer existing and new clients a broader portfolio of lending products, and provides greater flexibility, lower overall risk, increased profit and the ability to cross sell other bank products and services.

Product Approach and Outputs

Purchase order financing is an innovative and flexible lending product that enables companies, especially MSMEs, to fill purchase orders or sales contracts. Under this method of financing, when a company receives an an order for products, it is advanced by a lender sufficient funds to buy materials, manufacture, package and ship the order to the customer. When the customer pays for the order, the financial institution is repaid the amount advanced, plus interest and fees. The purchase order or sales contract serves as part of the collateral for the loan, thereby reducing the need for businesses to pledge real estate or other fixed assets that they often do not have or have already pledged. Initiating this method of financing typically requires working with banks and NBIs to gain their understanding and support of the finance method. The services provided under the Sibley Consortium product vary with the conditions prevailing in the partner country, but typically include:

  • Setting up SME finance funds with and without the participation of local banks and non-banking institutions
  • Working with banks and NBIs to structure and provide training in purchase order financing
  • Providing supporting evidence and technical expertise required to overcome regulatory or political barriers to purchase order financing
  • Training materials and policy and procedures manuals in English and Spanish currently.

How to Access Purchase Order Financing Solutions

The product is available from the Sibley Consortium through the General Business Trade and Investment II (GBTI II) indefinite quantity contract (IQC). A brief written request through the Mission or Regional Contracting Officer is all that is required by the fast-track procurement process set up by USAID to provide easy access to small businesses. Contact Theresa Stoll, GBTI II CTO, or Mark Karns, Deputy CTO, for more details on the fast-track process available to small businesses under USAID procurement regulations.

What Does It Cost?

This depends on the needs of each financial institution, current legal regulations, and market conditions. Though, the leverage effect of recent POF programs with banks in Armenia and Moldova were 10:1 in terms of amount of POF loans tendered (with resources from banks) to cost of expatriate technical assistance.

USAID Contacts:

Theresa Stoll
CTO GBTI II EGAT/EG
Tel: (202) 712-0924
Fax: (202) 216-3025
stoll@usaid.gov

Mark H. Karns, CFA
658427
Structured Finance Advisor
EGAT/ED/EDFM
Tel: (202) 712-5516
Fax: (202) 216-3025
mkarns@usaid.gov


Sibley Consortium Contacts:

Robert Rourke
Project Manager GBTI II
Tel: (202) 833-9588
Fax: (202) 775-9416
gbti@sibleyinternational.com

Donna Sibley
President
Tel: (202) 833-9588
Fax: (202) 775-9416
dsibley@sileyinternational.com