Mastering Purchase Order Funding for South African SMMEs

Purchase order funding can be an extremely useful form of financing for small and medium enterprises (SMMEs) in South Africa. However, many business owners still have questions surrounding how it works and whether it is the right solution for their company. This article aims to provide helpful and comprehensive answers to some of the most frequently asked questions about purchase order funding for South African SMMEs.

1. What is Purchase Order Funding?
2. How Does the Process Work?
3. What Are the Benefits for SMMEs?
4. What Types of Businesses are Eligible?
5. What Are the Costs and Fees?
6. What Does the Application Process Involve?
7. What Happens if I Can’t Repay the Financing?
8. Are There Any Alternatives Worth Considering?

What is Purchase Order Funding?

Purchase order funding is a short term funding that provides businesses with the working capital to fulfill customer purchase orders. It advances a portion of the value of the purchase order so that the business has cash to pay suppliers and fulfill the order. The balance minus fees is paid out once the customer pays the invoice.

In essence the purchase order acts as collateral for the funding. So instead of turning down orders due to cash flow issues businesses can use purchase orders to access the funds to accept and fulfill the order and grow sales, profits and business.

How Does the Process Work?

1. A customer places a large purchase order with the SMME.
2. The SMME secures supplier quotes but lacks enough working capital to fulfill the order.
3. The SMME applies for purchase order funding, providing the purchase order and supplier quotes.
4. The lender advances a portion of the order value, allowing the SMME to pay suppliers.
5. Once the order is fulfilled, the customer pays the lender directly, and the lender deducts fees before sending the balance to the SMME.

So in essence the funding company is fronting a portion of the costs on behalf of the SMME so they can fulfill orders they would otherwise not be able to fund.

What Are the Benefits for SMMEs?

• Access capital – Gain funding even without qualifying for traditional loans.
• Fulfill large orders – Complete orders you couldn’t otherwise afford to fulfill.
• Improve cash flow – Get paid faster instead of waiting for 30-90 days for customer payments.
• Boost growth – Increase sales and profits by taking on more business.
• Build credit – Establish business credit by demonstrating reliability in repayments.

In a nutshell, purchase order funding provides fast, flexible working capital so you can fund growth on your purchase orders versus turning business away.

What Types of Businesses are Eligible?

Purchase order funding is best suited to B2B businesses that deal with tangible goods, including:

• Manufacturers
• Wholesalers
• Distributors
• Importers/Exporters

Service companies generally do not qualify, as there is no physical product involved. Lenders also prefer working with established businesses with a track record, as opposed to brand new startups.

What Are the Costs and Fees?

As with most financing options, purchase order funding comes with certain costs and fees:

• Interest rate – Typically 1.5-4% per 30 days.
• Transaction fee – Ranges from 3-7% of the purchase order amount.
• Early repayment fee – Around 2% if repaid before 30 days.

For example, on a R100,000 purchase order funded at 4% interest and a 5% transaction fee:

• Interest costs = R4,000
• Transaction fee = R5,000
• Total cost = R9,000

While the rates are higher than traditional lending, the ability to access capital and fulfill orders often makes the costs justifiable.

What Does the Application Process Involve?

The application process is straightforward. You will need to provide:

• Business registration documents
• Several months of bank statements
• A valid purchase order from the customer
• Supplier quotes/invoices

The lender will review this information, assess the order viability, and determine financing eligibility. For approved applications, you can often access funding within a few days.

What Happens if I Can’t Repay the Financing?

If your customer fails to pay their invoice for the order, leaving you unable to repay the lender, there can be several consequences:

• Late fees and rising interest costs.
• Legal action.
• Difficulty securing financing again.

To avoid defaults only use purchase order funding when you are confident in the customer’s ability to pay. Vet clients thoroughly, use purchase agreements and take steps to ensure timely payments. Be proactive with lenders too – communicate openly about any issues so they can assist and help preserve the relationship.

Are There Any Alternatives Worth Considering?

The main alternatives to purchase order funding include:

• Bank loans – Lower rates but stricter qualifications.
• Invoice factoring – Sell unpaid invoices for quick working capital.
• Inventory loans – Use existing inventory as collateral.
• Crowdfunding – Gain small investments from a crowd of individuals.
• Angel investors – Get funding from high-net-worth individuals.

Each option has its pros and cons to consider when deciding what’s best for your business. Purchase order funding is a nice middle ground with easy qualifications, quick funding and flexibility.

The Bottom Line

Purchase order funding for South African SMMEs to fund inventory and fulfill large orders for customers. Easy qualifications, fast approvals and no collateral required. Fill the gap between winning sales and growth capital.

Need more information? Reach out to our financing expe