By Emeka Anaeto
LAST week, we began a new series on business finance or bank loan as it relates to Local Purchase Order (LPO) or contract financing.
We had explained that an LPO or PO (purchase order) is a commercial document, an official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.
In the event the LPO beneficiary does not have enough money to execute the contract, a special kind of loan is in place in most banks to help. But before the banks could be of any funding help, certain standard requirements should be in place on the part of the LPO holder.
Just as every agreement has its terms and conditions, there are some criteria which you will need to meet in getting your bank to finance your LPO or contract.
While the details may vary from bank to bank, the general requirements can be grouped as follows:
Your credit worthiness
This is the most critical of all the requirements, as the main reason why a bank reviews your loan request is to determine your credit worthiness. To do this, the bank relies on your bank statements, i.e. do your accounts get overdrawn, have your cheques ever been returned (bounced) as a result of insufficient funds? A credit check will also be conducted from credit bureaus to find out if you have non-performing loans in any financial institution. The bank would also be interested in your business cash flow, and this has to do with your ability to manage the amount of money involved in the execution of the LPO, your track record in cash management.
Ability to execute the LPO/Contract
Often, it is expected that you would have executed similar contracts in the past. If this is the case, you will need to provide copies of such LPOs or contract agreement, completion certificates, payment invoices from the contract employer and the bank statements that reflect these payments. If you don’t have these it would be difficult to get any bank to finance your LPO without asking for a hefty collateral or security. The interest rate on the loan would also be higher if you don’t have these because the bank would consider you a high risk.
Next week, we shall examine the remaining two requirements in LPO finance.