Procurement Financing as a Tool for Scaling a Business Without a Bank Loan

Procurement financing becomes relevant when a company sees an opportunity to increase sales, receives a large order, or plans to expand production, but needs additional resources to take the next step. It may be necessary to purchase goods, raw materials, or supplies; acquire equipment; or increase inventory levels. If the entire amount is paid up front, a significant portion of working capital is temporarily tied up and unavailable for operational activities.

For a growing business, this situation arises regularly. The higher the sales volume, the more funds must be invested in purchases even before receiving revenue from customers. One way to manage this time lag is to spread out purchase payments and align them with future cash inflows.

Why does a lack of working capital limit business growth?

A company may have customers, confirmed orders, and sufficient margins, but at the same time lack the available liquidity to increase its turnover. The reason often lies in the structure of the operating cycle: the business first pays suppliers, covers logistics, salaries, and other expenses, and receives payment from customers later.

In business, this problem arises when inventory levels increase. A manufacturing company needs to purchase raw materials and components in advance. A construction company finances materials until a phase of work is completed. A medical center may need new equipment to launch a service and only then begin generating revenue from it.

A similar logic applies to agribusiness, logistics, HoReCa, and service companies. Scaling a business increases the need for working capital, since a larger volume of operations typically requires larger purchases.

Let’s imagine a distributor who sells 2 million UAH worth of goods each month and plans to increase sales by 30%. To support the new sales volume, the distributor needs to purchase an additional 400,000 UAH worth of products. If the supplier requires full prepayment, this money must be withdrawn from working capital before the goods are even sold.

The problem becomes particularly acute when a business must simultaneously pay salaries, taxes, rent, and logistics costs while fulfilling prior obligations. Even a profitable company can face a cash flow gap under such conditions due to the mismatch between the dates of cash inflows and outflows.

What types of purchases can a business use to scale up?

Expanding a company often requires investment even before additional revenue is generated. Financing for business purchases can be considered for various categories of goods, resources, and services, provided they are directly related to the company’s operations or growth.

Such purchases may include:

• funding for the purchase of goods to increase inventory levels;
• raw materials and supplies to fulfill the production plan;
• production equipment to increase capacity;
• computer and office equipment;
• transportation and logistics equipment;
• professional equipment for the medical, HoReCa, construction, and service industries;
• components and consumables;
• goods and services for launching a new business line;
• resources for fulfilling a large contract.

The mere fact that payment can be spread out does not in itself determine the economic feasibility of the purchase. It is necessary to assess the additional cash flow it can generate, when the revenue will be received, and what the margin will be after all expenses are taken into account.

For a retail business, one of the key metrics is inventory turnover. For equipment, you need to evaluate the payback period, productivity gains, savings in operating costs, or revenue from new services. If the purchase is necessary to fulfill a specific contract, the main focus should be on the customer’s payment terms.

How does procurement financing without a bank loan work?

The “Buy Now, Pay Later” (BNPL) model is gradually gaining traction in the B2B market. Under B2B BNPL, the purchasing company receives the desired goods or services, and payment is made in installments or at a later date. The supplier, with the participation of a financial partner, can receive payment under the agreement immediately.

This mechanism differs from traditional lending primarily in the specific purpose of the transaction. A bank loan may involve receiving a certain amount of funds for subsequent use in accordance with the terms of the agreement. In B2B BNPL, financing is tied to a specific purchase of goods or services from a supplier.

The application process, collateral requirements, approval timelines, payment schedules, and the seller’s involvement in the process may also vary. Therefore, when selecting a financing instrument, a company should compare the actual terms of specific offers: the total cost of financing, terms, payments, potential fees, requirements for the buyer, and the consequences of late payments.

Financing without a bank loan can be one option for companies that need to make a specific B2B purchase while preserving part of their equity for operating expenses. The decision should be based on the financial metrics of the transaction itself and the cash flow forecast.

How does procurement financing help scale a business?

Let’s consider a hypothetical example. A manufacturing company has received an order worth 1 million UAH. To fulfill it, the company needs to purchase materials worth 500,000 UAH. The customer will pay after the finished products are delivered, but the materials supplier expects payment earlier.

If the company pays 500,000 UAH from its own funds, that amount will be temporarily withdrawn from its working capital. At the same time, the company needs to cover salaries, energy costs, logistics, and current orders. Its liquidity reserves will decrease precisely during the period when it is fulfilling a large contract.

If payment for materials is spread out over several installments, the situation changes. A portion of the future revenue from the contract may be used to cover subsequent payments for the purchase. The specific outcome will depend on the payment schedule, the order’s profit margin, and the actual date the funds are received from the client.

In practice, this approach can be used for several business objectives:

• increasing inventory levels ahead of the peak demand season;
• fulfilling an order that exceeds the company’s usual sales volume;
• purchasing equipment to expand production capacity;
• launching a new product, service, or line of business;
• preserving working capital for salaries, logistics, taxes, and other operating expenses;
• reducing the likelihood of a cash flow gap caused by a large one-time purchase.

The figures provided are illustrative and are used solely to explain the financial mechanics. In real-world business, you need to take into account contract terms, taxes, cost of goods sold, margins, seasonality, and other payments.

This is exactly how eDilo works for buyers. The service allows businesses to process purchases in installments online, with payments spread out according to an agreed-upon schedule. The model is designed so that the seller can receive payment for goods or services on the day of the transaction, while the buyer makes payments in installments by specified deadlines. The principle of how B2B financing works is described in more detail on the eDilo page.

When is financing a purchase economically justified?

The decision should start with a cash flow forecast. A company needs to know how much money the purchase will require, how much revenue it will potentially generate, when that revenue will turn into actual cash inflows, and what payments will need to be made until that point.

The calculation logic might look like this:

expected additional revenue → gross margin→ inventory turnover or payback period → payment schedule → remaining liquidity after each payment.

Suppose a company purchases goods worth 600,000 UAH and plans to sell them in three months for 850,000 UAH. The difference of 250,000 UAH alone is not enough to conclude that the venture is economically viable. You need to subtract logistics, storage, marketing, taxes, selling expenses, and financing costs. You also need to verify when buyers will actually pay.

Seasonal businesses require particularly careful planning. A company may purchase goods in August, sell them actively in September and October, and receive the bulk of its revenue only at the end of the season. If significant payments for purchases occur before cash is received from customers, the risk of a liquidity shortfall persists.

Therefore, the schedule should be compared with the actual operating cycle. To do this, it’s helpful to create a monthly or even weekly cash flow forecast. The eDilo blog features a separate article on business financial models, which explores in more detail the relationship between assumptions, financial results, and actual cash flow. For companies with pronounced seasonality, the article on managing cash flow gaps during seasonal spikes in demand will also be helpful.

How do you assess the financing of a purchase before finalizing the deal?

It’s best to perform this calculation before agreeing on the amount and schedule. All you need is a financial model that shows cash flow under base-case and worst-case scenarios.

The practical process looks like this:

1. Determine the exact purchase amount. Take into account the cost of the goods, shipping, installation, insurance, and any related expenses, if applicable.
2. Calculate your available working capital. Determine the amount of funds that can realistically be used for the purchase without compromising your current obligations.
3. Set aside a liquidity reserve. A portion of the funds should remain available for payroll, taxes, rent, logistics, and unforeseen expenses.
4. Forecast additional revenue. The calculation should be based on confirmed orders, historical sales, or a reasonable demand forecast.
5. Calculate the contribution margin. Factor in the cost of goods sold and expenses directly related to the additional sales.
6. Determine turnover or payback period. For inventory, estimate the time it will take to sell the stock; for equipment, estimate the period during which the investment will generate a sufficient economic return.
7. Obtain a complete payment schedule. The financial model must specify the amounts and dates of all future payments.
8. Compare the schedule with the cash flow. Check the cash balance after each payment.
9. Develop a pessimistic scenario. For example, reduce the sales forecast by 20%, extend the inventory turnover period, or delay customer payments by one month.
10. Determine an acceptable financing amount and term. The parameters must align with the company’s cash flow capacity even under a less favorable scenario.

This calculation allows you to identify a potential cash flow gap even before closing a deal. If, after one of the payments, the projected cash balance becomes critically low, you need to review the purchase amount, the payment schedule, or your own cash reserve.

What mistakes should you avoid when scaling up with financing?

The greatest risk arises when a company views available business financing as an excuse to increase purchases without verifying demand. Additional inventory in the warehouse does not, in and of itself, generate cash flow. It turns into cash only after it is sold and the buyer has actually paid for it.

A second common mistake is related to seasonality. Last year’s sales can serve as a benchmark, but changes in demand, prices, or the competitive landscape can increase inventory turnover time.

Another risk arises when a company uses the entire available amount and leaves only a minimal liquidity reserve. A business needs working capital on a daily basis, so after making a purchase, the company must have the resources to finance its operating activities.

The relationship between inventory turnover and the payment schedule warrants special attention. If inventory is sold on average within 120 days, but a significant portion of payments is received within the first 60 days, the company will begin making payments before it receives the projected revenue. This structure can put additional strain on cash flow.

A similar logic applies to equipment. You need to estimate the time required for delivery, installation, commissioning, staff training, and reaching planned productivity levels. It sometimes takes several months between paying for the equipment and generating the first revenue from its use.

Installment payments for businesses work most predictably when payment schedules align with the operating cycle, the company maintains a liquidity reserve, and the purchase serves a clear business purpose.

Financing Purchases as Part of a Business’s Financial Strategy

Spreading out payments can support a company’s growth if the purchased goods, materials, or equipment generate a predictable cash flow. This allows the business to use the resource sooner and pay for it gradually according to an agreed-upon schedule.

Before finalizing the deal, you need to calculate the purchase margin, inventory turnover, or the equipment’s payback period, as well as the projected dates for revenue receipt and the remaining liquidity after future payments. A separate worst-case scenario will show whether the financial model can withstand delayed payments or lower sales.

B2B installment payment services can be used as one of the tools for organizing such purchases. Current terms, available credit limits, payment schedules, and financing costs should be verified immediately before finalizing the transaction, as the service terms are subject to change.