LPO Financing and Invoice Discounting: Unlocking Cash Flow for Kenyan Suppliers

Winning a large order is one of the most exciting moments for any supplier. A local purchase order (LPO) from a government ministry, a county, a large corporate or an international NGO can transform a small business. But excitement quickly turns to pressure when the supplier realises that the goods must be purchased upfront, while payment may only arrive weeks or months after delivery. LPO financing and invoice discounting were created to solve this cash flow gap.

The supplier's cash flow problem

Consider a supplier who wins an LPO worth several million shillings to deliver office equipment. To fulfil it, the supplier must pay the manufacturer or importer before delivery. After delivery, the buyer may take thirty, sixty or even ninety days or more to pay. Without external funding, the supplier must either decline the order, delay delivery or stretch other parts of the business to breaking point.

Trade finance bridges this gap, allowing the supplier to fund the order and grow, using the buyer's commitment to pay as the foundation of the facility.

What is LPO financing?

LPO financing is a short-term facility that funds the cost of goods or materials needed to fulfil a confirmed purchase order. Typically, the lender pays the supplier's supplier directly, ensuring the goods are purchased and delivered. When the buyer pays for the delivered goods, the payment is used to repay the lender, with the balance — the supplier's margin — released to the supplier.

How a typical LPO transaction works

1. The supplier receives a valid LPO from a creditworthy buyer.
2. The supplier obtains quotations from the source of the goods.
3. The lender assesses the LPO, the buyer, the supplier's track record and the margin.
4. The lender pays the source of goods directly, often after the supplier contributes a portion.
5. The supplier delivers and obtains signed delivery notes and acceptance documents.
6. The supplier invoices the buyer, and payment is directed to settle the facility.

What is invoice discounting?

Invoice discounting applies after delivery. Once the supplier has delivered and invoiced the buyer, the lender advances a percentage of the invoice value immediately. When the buyer pays, the lender recovers the advance plus its charges, and the balance is passed to the supplier. Invoice discounting turns unpaid invoices into working capital that can be used to fund the next order.

Your order book is an asset. Trade finance lets you put it to work before the cash arrives.

Who benefits most?

• Suppliers to national and county governments.
• Contractors and service providers to large corporates.
• Suppliers to NGOs, development agencies and international organisations.
• Distributors supplying supermarkets and institutions on credit terms.
• Importers with confirmed buyers for the goods they bring in.

What lenders assess

Trade finance is assessed differently from traditional loans. The strength of the transaction matters as much as the strength of the borrower:

• The buyer: their reputation and history of paying suppliers.
• The document: authenticity and terms of the LPO, contract or invoice.
• The margin: whether the transaction is profitable after financing costs.
• The supplier's track record: experience delivering similar orders.
• The source of goods: reliability of the supplier's own suppliers.
• Payment routing: how the buyer's payment will be directed to settle the facility.

Understanding the costs

Trade finance charges are usually based on the amount advanced and the period it is outstanding, along with any arrangement or processing fees. Because the facility is short-term, the cost should be compared against the profit margin on the transaction. A useful test is simple: after paying all financing costs, does the order still make a healthy profit? If so, trade finance can multiply the number of orders you can take on.

Managing the risks

• Late payment: buyers may pay later than expected. Agree upfront how extended periods will be handled and factor potential delays into your pricing.
• Delivery disputes: ensure goods meet specifications and obtain signed delivery and acceptance documents.
• Concentration: relying on a single buyer increases risk. Diversify where possible.
• Goods in transit: insure goods during transport. SilverHouse Insurance can arrange marine cargo and goods-in-transit cover.

Preparing a strong application

1. Keep copies of past LPOs, delivery notes and payment records to demonstrate your track record.
2. Prepare a simple costing showing the purchase price, delivery costs and expected margin.
3. Have your company registration documents, KRA PIN and tax compliance certificate ready.
4. Provide bank statements that show the flow of previous contract payments.
5. Be transparent about other facilities and obligations.

Building a growth engine

Suppliers who use trade finance well often grow rapidly, because their capacity to take on orders is no longer limited by their cash balance. Each completed transaction strengthens their track record, improves their terms and expands the facilities available to them. Over time, a well-managed trade finance relationship becomes a strategic tool for scaling the business.

Trade finance with SilverHouse Credit

SilverHouse Credit provides LPO financing, invoice discounting and import finance for suppliers who have won business from creditworthy buyers. We assess each transaction carefully, pay suppliers directly where appropriate and structure facilities that grow with your order book. Apply now with your LPO or invoice and a relationship manager will review it with you.