Getting your bank to finance your next LPO/contract (3)

JUST before we do the concluding part of this series focusing on Local Purchase Order (LPO), let’s look at the financial obligation of or commitment required of you that want a bank to finance your LPO.

In the last two editions of this topic, we had noted that LPO financing allows a businessman who has obtained purchase orders or letters of award of contract to deliver goods and services or to carry out contractual works, even when he or his company does not have the money required, to execute the contract.

We had also noted that 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.

Last week, we treated the first two requirements/ terms which are your credit worthiness and your ability to execute the LPO/Contract. We shall now conclude with a focus on the other two requirements your bank will be looking out for in granting your request for LPO finance, viz, Your Commitment and Payment ability of the LPO/Contract issuer.

Commitment
You will be required to make an equity contribution. This may vary from 10-20% of the cost of executing the LPO/Contract. For example: you have been issued a N10million purchase order to supply telephones and the cost of purchasing and delivering the telephones is N7million; your equity contribution will be 10-20% of N7million which is N700,000 to N1.4million. Some banks may require more.

The purpose of this is to be sure your own money is involved and that you will be serious in ensuring the monies return.

It is actually a form of collateral or security for the bank’s lending. It should be noted that the higher the risk level assigned to the transaction by the bank, the higher your commitment fee would be. It also reflects in the interest or lending rate the bank will charge, meaning the higher the perceived risk the higher the rate.

We shall be looking at the final requirement and other issues associated with raising LPO finance next week.

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