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.What is purchase order funding?

Purchase order funding is a form of short-term financing that provides businesses with the working capital needed to fulfill customer purchase orders. It works by advancing a portion of the value of the purchase order so that the business has enough cash on hand to pay their suppliers and fulfill the order. The remaining balance, minus fees, is paid out once the customer pays their invoice.Essentially, the purchase order acts as collateral for the financing. So rather than turning down orders due to cash flow issues, businesses can leverage purchase orders to access the funds required to accept and fulfill the order. This helps them boost sales, profits, and growth.

How does the process work?

Here is a quick rundown of the purchase order funding process:

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 as proof of the order size and costs
4. The lender advances a portion of the order value, allowing the SMME to pay suppliers

Once the order is fulfilled, the customer pays the lender directly

1. The lender deducts the financing fees and sends the balance to the SMME

So essentially, the financing company fronts a portion of the costs on the SMME's behalf, allowing them to fulfill orders they would otherwise struggle to fund.

What are the benefits for SMMEs?

There are several major benefits of using purchase order funding for South African SMMEs:

• Access capital – Gain access to funding even if you don't qualify for traditional loans
• Fulfill orders – Accept and deliver on large orders you couldn't fund otherwise
• Improve cash flow – Get paid faster instead of waiting 30-90 days for customer payments
• Boost growth – Increase sales and profits by taking on more business
• Build credit – Demonstrate reliability and repay loans to establish business credit

In a nutshell, it 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, including:

• 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
• So 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 quite simple and 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.Can I use purchase order funding multiple times?

Absolutely. You can continually reuse purchase order funding as long as you have eligible purchase orders from creditworthy business customers. Just be sure to repay your existing financing on time before taking out funding for new orders. This helps build your credibility with lenders.The key is leveraging each opportunity to establish a solid repayment history so that securing funding for future orders becomes faster and easier over time.

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're extremely confident in your customer's ability to pay. Thoroughly vet clients, use purchase agreements, and take steps to ensure timely payments.Be proactive with lenders as well - 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 – If you can qualify, rates are lower but often come with more restrictions
• Invoice factoring – Sell unpaid invoices to access working capital
• Inventory loans – Use existing inventory as collateral for loans
• Crowdfunding – Gain small investments from a crowd of individuals
• Angel investors – Get funding from high net-worth individuals

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

The Bottom Line

Purchase order funding can be an affordable and accessible financing solution for South African SMMEs looking to fund inventory and fulfill large orders for customers. With flexible qualifications, fast approvals, and no collateral required, it bridges the gap many small businesses face between winning sales and securing growth capital. Does your B2B company need working capital to take on a new purchase order? If so, reach out to our financing experts to learn more about qualifying for purchase order funding tailored specifically to South African SMMEs.