Purchase Order Funding

What is Purchase Order Funding?

Purchase order finance bridges the gap between order and payment and has the advantage of being faster and easier to obtain than a traditional bank loan. A purchase order loan is based on the creditworthiness of your buyer (customer) and your business.

• Is designed specifically to help wholesalers and distributors who resell products to commercial customers
• Is used by companies who need funds to pay suppliers
• Helps companies grow past their financial limitations

Businesses in South Africa often face problems when they try to secure large orders from new customers. Competing for new business is a difficult process in itself since customers are constantly looking for the lowest price. Another challenge is getting the capital to buy supplies or products to deliver on the new orders.

Your SME (Small to Medium Enterprise) may be in a position where it is not able to fulfil a customer’s order because it does not have the materials in stock or the cash to acquire them. When this happens, the business risks losing both the order and the customer. That’s where purchase order finance can help.  

Purchase order funding (otherwise known as Tender Finance) in South Africa has become a popular way to finance a company that has received a large purchase order from a customer. This is one step before the invoice is generated.

What is a Purchase Order?  

A purchase order (also known as a PO) is a document that is used to record the goods or services that a company wants to buy and the price that it will pay for the goods. This official document is used to keep track of the purchasing process.  

A purchase order is often used when one company wants to buy goods from another company. The buyer will send a purchase order to the seller and ask them to provide all of the details about what they want and how much they are willing to pay for it. Once this information has been received, the seller can then decide whether or not they want to do business with them.

It's legally binding

When an organisation accepts a PO, it becomes a legally binding contract.

They help companies grow  

If you feel you are facing financial limitations, then Purchase Order Funding can help you get funds to pay suppliers. This business loan is designed specifically to help wholesalers and distributors who resell products to commercial customers.

Alternative Lenders at your call

A lot of SMEs don’t have a long-standing trading history or capital to procure goods on behalf of their customer. The need for tender financing arose when there was an obvious gap with financial assistance for small businesses.

These SMEs were unable to fulfil the purchase orders that were awarded to them and thus needed business funding. Alternative lenders look at the purchase order and credit history.  

What Can You Use Purchase Order Funding for?

This loan is a bit more specific when it comes to its use.

The business loan is granted on the fact that a customer has submitted a purchase order.

Purchase Order Types

There are two different types of purchase orders:  

• Supply and delivery of goods – goods include: electricity, gas, wholesale, printing etc. For these types of purchase orders, the level of experience needed by the borrower will be determined by the lender, in some cases very little experience is required by the lender for the execution of the purchase order.  
• Supply of services -  services include; construction, installation, manufacturing, facilitation and labour requirements – for this purchase order experience is required, especially in construction, installation and manufacturing.

Remember: Purchase Order Funding is granted because of a purchase order, so you need to prove that the purchase is legally binding from the customer’s side. Meaning they are obligated to pay the invoice once the purchase order has been fulfilled.  

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How does Purchase Order Funding work?

PO funding has two main features:

• A solid purchase order deal – either from the government or a corporate ,
• Loan approval is based on a combination of the validity of the purchase order and the borrower's ability to deliver on the purchase order.

Step 1: Look for Finance

Generally, when you have a valid purchase order from a client, you will use that document to look for finance.

Using a comparison service like FundingHub is a great way to do this, because you get multiple offers in one place, and you only have to apply once.

Step 2: Use Finance for Delivery/Supply of Goods

Once you've got the finance you need, you'll put that money to work to deliver on the purchase order.

This is where your skills and expertise kick in!

Step 3: Finalize Delivery and Get Paid

Once you've finished your part of the contract, you should get an acceptance from the customer that the goods or services have been successfully delivered.

They will then pay you directly.

Step 4: Pay Back the Lender

Sometimes this might happen automatically, but once you have been paid, you now have to pay back the lender the financed amount, plus any fee's.

Step 5: Use the Profits to Grow Your Business!

Re-invest the profit you just made from the purchase order and continue to grow and thrive!

How much does Purchase Order Funding Cost?

The fee's in PO's are relatively simple.

Because the contracts are for fixed periods, the lender will quote you a fixed fee for the finance.

From that, you'll know exactly how much you need to account for upfront.

A typical purchase order finance deal will cost from around 4% of the purchase order amount to 6% of the purchase order amount.

This will vary from lender to lender.