Updated on June 29, 2024: Added detailed information about key components of a local purchase order, the purpose of a local purchase order, challenges and limitations, how a local purchase order works, and the benefits of using local purchase orders.
In simple terms, a Local Purchase Order better known as LPO is a commercial document issued by a client or buyer to a vendor or seller for the purchase of goods.
Usually, a client will have first issued a quotation or tender to the customer for the supply of these goods.
A local purchase order is a legally binding document.
Note a “Work Order” is a document issued by a customer to a vendor requesting works done.
Also, read about books for business start-ups and development
Local Purchase Orders are designed for businesses that do not have enough working capital or cash.
You do not have to have any form of security in the way of physical assets that other types of loans require.
So what are my options to finance this Local Purchase Order?
1. Private investors
For you to get an LPO, you might want to consider getting financing from shylocks.
This option, however, has a very high interest, all you need to do is ensure that you do your math right before committing.
Involving a shylock is very costly. In doing your math, you will know precisely what amount you will make in profits.
2. Banks
Most banks these days finance Local Purchase Orders.
These banks include KCB, National Bank, Equity, CO-OP, Diamond Trust Bank and Gulf African Bank, among others.
Most banks can finance LPOs from Ksh. 10,000 to around Ksh. 5,000,000.
Banks, however, have limitations like you must have an account with them before you can get financing.
Good credit is also a requirement if you want to get financing from a bank, this might be a little tough if you are just starting though.
These are some of the requirements different kinds of banks require to finance a Local Purchase Order:
- A Valid LPO from a ministry or Parastatal, a reputable (blue chip) company, listed NGOs or KCB List of Corporate companies
- A quotation of items of purchase from the supplier
- Statements for the last six months (for non-customers)
- Copy of proposed collateral for borrowings above Kshs. 1,000,000
- Valid business registration and permit documents
- Valuation report where applicable
- Audited accounts for amounts above 5.0 M
- List of past contracts completed – dates, amounts, etc
- Debtor/creditor duly aged analysis
- 3% negotiation fees on the financed amount
3. Microfinance solutions
Save from banks, and microfinance institutions can also offer business loans that you can use to finance Local Purchase Orders.
The Kenya Women Finance Trust and Faulu Kenya are an excellent example of institutions that can offer loans in case you are a member and have shares in them.
As a business, however, you might not be in a position to apply for one unless you are operating as a sole proprietor.
This is because a sole proprietor is the only decision-maker and do not need any consultation when making decisions.
A sole proprietor is also affected directly by their actions in business; thus will be more accountable for such a move.
Women and the youth are also encouraged to get loans from these institutions as they are geared to helping such groups.
Key Components Of A Local Purchase Order
A typical LPO includes:
Vendor Information
Name, address, and contact details of the seller.
Product/Service Details: Description, quantity, and specifications of the items or services being purchased.
Pricing and Payment Terms: Agreed prices, discounts, taxes, and payment terms.
Delivery Details
Address, date, and any special instructions for delivery.
Legal Terms: Terms and conditions governing the purchase, including warranties and dispute resolution mechanisms.
The Purpose of a Local Purchase Order
Local purchase orders serve several critical purposes in business transactions.
- Ensuring Clarity – An LPO ensures that both parties have a clear understanding of what is being purchased, at what price, and under what terms. This clarity helps prevent misunderstandings and disputes.
- Legal Protection – Once accepted, an LPO becomes a legally binding contract. This offers legal protection to both the buyer and the seller, ensuring that both parties fulfill their obligations.
How a Local Purchase Order Works
- The Creation Process – The creation of an LPO typically begins with the buyer identifying a need for goods or services. The buyer then gathers all necessary information and drafts the purchase order, specifying all relevant details.
- Approval and Issuance – The draft LPO is reviewed and approved by the relevant authorities within the buyer’s organization. Once approved, it is issued to the seller, who can then accept or negotiate the terms.
Types of Local Purchase Orders
There are several types of local purchase orders, each serving different needs.
- Standard Purchase Orders – These are used for one-time purchases of goods or services. They specify exact quantities, prices, and delivery dates.
- Blanket Purchase Orders – These cover multiple purchases over a specified period, often used for recurring orders with set prices.
- Contract Purchase Orders – These are used when the buyer and seller enter into a long-term agreement, specifying terms for multiple transactions over a period.
Benefits of Using Local Purchase Orders
- Streamlined Procurement Process – LPOs streamline the procurement process by providing a clear and standardized method for requesting and approving purchases.
- Better Budget Management – They help businesses manage their budgets more effectively by keeping track of expenditures and ensuring that all purchases are pre-approved.
Challenges and Limitations
Despite their benefits, LPOs also come with some challenges.
- Potential Delays – The approval process for LPOs can sometimes cause delays, especially if multiple approvals are needed.
- Risk of Errors – Errors in LPOs, such as incorrect quantities or pricing, can lead to issues with order fulfillment and payment.
What Microfinance Solutions Require to Finance a Local Purchase Order
- A company must be registered with the relevant government body
- Companies, groups and partnerships membership composition must be at least 70% women and 30% men (or 100% women)
- A valid Local Purchase Order/Local Service Order duly signed and stamped by the procuring entity, i.e. public institutions (listed in the public procurement and disposal Act)
- Kshs. 2 Million is the maximum amount available for this loan per individual borrowing
- Duly signed Letter of Undertaking and acceptable collateral as per Fund’s Credit Policy. Acceptable collateral are bank guarantee, shares or motor vehicle
- Customer account details
- A one-off administration fee of 5% of the loan amount
- Tenure of 90 days
- Certified copy of the letter by the supplier (loanee) to the procuring entity requesting payment through Women Enterprise Fund
- Amount financed is 60% of the LPO amount
Also, read about business cash flow management
When you get started on a Local Purchase Order
When you get financing for a Local Purchase Order, these are some of the features that you receive:
- A grace period of up to 180 days
- A repayment period of up to 12 months renewable
- Amounts between Ksh. 50,000 to Ksh. 1,000,000
- Insurance covers death and permanent disability
- Flexible security requirements
- Financing of up to 75%
- Competitive interest rates charged
Local Purchase Order: Important notes to remember
- You should avoid duplicating purchases which may lead to losses by keeping a record of all your purchases.
- Keep a record of all purchases to avoid an overcharge by sellers or disagreements arising.
- Manage your inventory effectively to keep records of your purchases in an organized manner.
- With good records, you will have a good relationship between the seller and buyer hence easier to work together.
What is a Local Purchase Order? – FAQs
What is the main purpose of a local purchase order?
The main purpose of a local purchase order is to provide a formal, legally binding request for goods or services, ensuring clarity and protection for both the buyer and seller.
How does a local purchase order differ from a regular purchase order?
A local purchase order specifically refers to purchases made within a specific locality or region, while a regular purchase order can be used for any type of purchase, regardless of location.
Can a local purchase order be modified after approval?
Yes, a local purchase order can be modified after approval, but any changes must be documented and approved by the relevant authorities within the organization.
What happens if a local purchase order is not fulfilled?
If a local purchase order is not fulfilled, the buyer may have legal recourse against the seller, depending on the terms and conditions outlined in the LPO.
How can businesses improve their local purchase order processes?
Businesses can improve their local purchase order processes by implementing digital systems, maintaining accurate records, and regularly reviewing and updating their LPO procedures.
Conclusion
Local purchase orders (LPOs) play a vital role in the procurement process for businesses of all sizes. They provide clarity, legal protection, and streamline transactions between buyers and sellers. By understanding the components, purpose, and best practices for managing LPOs, businesses can significantly enhance their efficiency and accuracy in procurement activities. Leveraging technology to automate and digitize LPO processes can further reduce errors and delays, ensuring smooth operations. Ultimately, a well-managed LPO system is essential for effective budget management and maintaining strong vendor relationships.
