What you need to know about Purchase Order Funding in South Africa
Cash flow is the lifeblood of your business, so it’s important to keep it flowing unhindered. But, what if a customer places an order that exceeds your cash flow? Do you simply turn down the order? This would mean a loss of revenue and perhaps even a tarnished business reputation.
Purchase order funding assists businesses that need to make a purchase order but can’t afford to. It has assisted in the growth of many businesses in South Africa. Before you turn down a great business opportunity due to the lack of cash flow, find out how this type of funding can help your business.
Is your business experiencing cash flow problems caused by growth-related challenges? Often, growing businesses in South Africa need access to more cash to complete a customer’s order. Purchase order funding may be the solution you need to prevent losing a customer due to the lack of cash to acquire stock or materials.
We’ve answered the following important questions about purchase order funding:
- What is purchase order funding?
- How does it work?
- Who uses this type of funding?
- What are the advantages?
- What are the disadvantages?
- Does my business qualify for purchase order funding?
- How does the funding provider benefit?
Continue reading to see whether it’s the right option for your business.
1) What is purchase order funding?
Purchase order funding, also known as PO funding, provides businesses, which may have not had the opportunity without funding, the opportunity to accept large orders. It is a short-term commercial finance option that provides a business the capital they need to pay suppliers upfront for purchase orders.
By making use of PO funding, your business can pay suppliers before receiving payments from customers.
PO funding may finance an entire order or a portion of it. The PO funding company often accepts the payment directly from the customer and, after subtracting their fees, sends you the balance of the invoice.
2) How does purchase order funding work?
The following parties are involved in the process:
- The company that needs funding to fulfill an order.
- The supplier who receives payment for the order from the PO funding company.
- The PO funding company that provides the funding for the purchase order after evaluating the order.
- The customer who receives their order thanks to the lender being able to help the company fulfill their order.
Here’s how purchase order funding works:
- You send the PO funding provider the purchase order as well as your supplier’s estimate. Remember to factor in the amount of time the supplier will take to manufacture the products you need as this may have an impact on your funding fees.
- If the lender approves the financing, they will pay your supplier for the purchase order.
- The customer receives their order from the supplier.
- You send your customer an invoice for their order.
- The customer sends payment for the order to the PO funding provider.
- The PO funding provider sends you the balance of the invoice after subtracting the funding and fees from the customer’s payment.
South African PO funding companies have different ways of charging businesses. Make sure you understand how the fees are calculated before agreeing to any PO funding. Other factors to take into consideration are: you must receive your purchase order from an established business-to-business (B2B) or business-to-government (B2G) business; and, the order must be above a certain amount, as stipulated by the PO funding provider, and have a decent profit margin to ensure you’re able to accommodate the funders fees.
3) Who uses purchase order funding?
If your customer places a large order and you cannot provide the full amount for the order to your supplier, PO funding can help you fulfill that order. Businesses that may use this type of funding include:
- Outsource manufacturers
- Businesses with increased seasonal sales
- Businesses that cannot afford to fulfill a big order due to limited cash flow
Basically, if your business relies on external suppliers for products that you resell, you can benefit from PO funding. With the help of PO funding, you can grow your business and onboard customers that you may not have been able to without the funding.
Keep in mind, if you have already delivered goods to a customer and invoiced them, then you should apply for invoice funding, not PO funding.
4) What are the advantages of purchase order funding?
- Gives your business the opportunity to leverage growth by providing the funding needed to meet customer needs.
- It’s not too difficult to meet the requirements. Even though funding companies check the creditworthiness of your customers before approving the funding, you don’t need an established business or high credit score.
- Unlike a business loan, you don’t have to provide a personal guarantee.
5) What are the disadvantages of purchase order funding?
- It’s only a short-term option. Unlike business loans, PO funding providers cannot be paid over an extended period of time.
- Depending on your agreement with your PO funding provider, delay in the payments could increase the cost of the funding. The best way to ensure you don’t incur additional costs, speak to your PO funding provider directly to find out all you need to know about the funding fees.
6) Does my business qualify for purchase order funding?
Funding approval will depend on your creditworthiness as well as that of your supplier’s. If you have established, reputable customers and suppliers, there’s a greater chance of receiving funding.
The criteria for applying for PO funding are:
- You sell finished goods, not raw materials or components of products
- You sell to B2B orB2G customers
- Your business has high-profit margins
Startups can also apply for PO funded provided their customers and suppliers are creditworthy and well-established.
7) How does the purchase order funding provider benefit?
The most important factor to take into account when applying for funding is cost. There must be a certain amount of profit in the deal for the PO funding provider to consider the deal. Depending on the lender, you will be charged a fee or interest.
Unahina Business Solutions simple process
PO funding is a great solution for your business if your sales growth is exceeding your cash flow. Let Unahina Business Solutions provide you with a PO funding proposal. Our application process is quick and easy. Get started with our easy four-step process.
Share this article