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Purchase Order Funding: The Complete Guide

In this guide, we’re going to break down everything you need to know about purchase order funding in SA.

What is purchase order finance?

In business, there isn’t much room for error or interpretation. Purchase orders are there to help prevent this, as the very nature of such a document is to clarify and confirm an arrangement or dealing. This ranges from quantities, product type through to terms associated with the deal. It is a guarantee, of sorts.

But, what is purchase order finance?

Purchase order finance, or purchase order funding, is the use of purchase orders (or ‘POs’) as a guarantee in order to find investment, financing, or fund a business. If a small sole proprietorship, start-up, or new business manages to secure business with a much larger entity, corporation or (more commonly) a state-owned enterprise, the small company can use those purchase orders provided by the larger company to secure financing or financial assistance from a third-party based on the purchase orders.

How much does purchase order financing cost?

Usually, every company and its respective purchase order deal would be evaluated by the finance company or funding entity, with a cost calculated on a percentage of the gross profit and security of the final transaction.

These are often calculated on a case-by-case basis, with each respective financing company offering various terms and conditions.

Advantages of Purchase Order Funding

Availability to new businesses

Most traditional credit lines, such as through bank loans, are only available to those established businesses that have years’ worth of audited financial statements, whereas start-ups and new companies can apply for purchase order financing, granted that they have credit worthiness and a proven track record, of course.

Ability to grow

The purchase order financing arrangement can grow alongside your businesses’ expansion. The better and more stable the purchase order, the greater the credit line that can be provided by purchase order funding.

Speed and efficiency

With traditional bank loans, the application and accessibility of the fund can be extensive. However, if all the necessary guarantees and confirmed POs are in order, purchase order financing allows the process to be expedited with minimal delay. You can access cash or capital quickly from your funders, or the financing company could pay your supplier directly in order for you to receive the goods or stock you need to fulfill the order.

Disadvantages of Purchase Order Funding

There are of course some caveats to purchase order financing, which helps protect you as the business owner, along with your clients and the financiers.

Limitation of workflow processes / must be direct-to-customer

Companies that are most likely to get purchase order financing are those who directly supply a finished product to a customer. This makes the transaction process of a financing company, who will make the purchase of the stock for your business, a straightforward one. Businesses that are just a single part of a longer production process are unlikely to receive purchase order financing support.

On-going dependency

A common problem with purchase order financing is that small businesses see it as a short-term solution for a single order or transaction. The problem is though that this elevates the expectation and future orders to the small company, and with subsequent orders, they will once again require more funding to fulfill those. If profits from the first big order are not managed efficiently, this creates a recurring dependency on a financier to keep the company operating.

Minimum gross margin

Most purchase order funding options will only happen if there is a minimum 20% gross margin on the transaction. If the profit on your stock or resource is notably small, this will make it more difficult to incentivise a funder to provide financing to the supplier.

How does the application process work?

  1. You apply through the FundingHub application form.
  2. You’ll get an email requesting more information and documentation if you didn’t provide it all straight away. Have a look at the requirements section to see what you need.
  3. Your application is reviewed by the FundingHub team. This can only happen when you have sent us all the information and documents required. It will take approximately 12 hours to process.
  4. We find you the best PO funder in South Africa, according to your specific PO and business.
  5. We pass on your details and application to that funder and they get in touch with you directly to confirm everything.
  6. You deal with them directly to finish your application.
  7. If your application is successful, funds are normally disbursed anywhere from 3 to 4 days through to 2 weeks.
  8. If your application is not a good fit for that funder, you can get back in touch with us and we will find you an alternative.

How long does a purchase order application take?

Time is of the essence, that’s why we treat every purchase order application as urgent.

The number one rule when answering this question is that for an application to go quickly - you need to have all your documentation ready.

If you can supply us with all your documents and answers from the word go, this is what a potential timeline may look like:

  • Application submitted through FundingHub.
  • Application processed and transferred to preferred partner on the same business day (if submitted before 12pm).
  • Partner contacts you that afternoon or the following work day.
  • If all documentation is ready, partner application goes under consideration for between 3 and 4 days, depending on the partner. Some may be up to a week - depending on the size of the deal and the parties involved. If there is lots of due diligence and vetting required, expect a period of up to a week.
  • Application (hopefully) accepted and funds disbursed.

Please note, this is only a guideline. Some time variances may occur according to your application and how busy the partners are.

We can only control the FundingHub side of things. Our promise there is that we will process your application (if completed in full) and send the relevant partner(s) within one working day of the full application being received.

What’s the quickest way to get your purchase order funded?

We get you.

You’ve got a purchase order and the due date is coming in a week’s time. Getting funding for your purchase order is extremely urgent.

What’s the best way to go about it so that you get your finance as quickly as possible?

Here are some quick tips:

  1. Make sure you have all your documentation ready and waiting. Check out the requirements below to see what you’ll need.
  2. Make sure you’ve got a supplier with a quotation that can be submitted and the supplier is definitely able to deliver the goods required in the amount of time you have. If not, find another supplier.
  3. Apply here for purchase order funding and makes sure to put in your due date. That way we’ll know it’s urgent and we’ll treat your application with the urgency it requires.
  4. Make sure you upload all the documentation I mentioned above to the application so we can pass it straight to the partners.
  5. Answer your phone! You’ll be surprised to hear how many people ignore calls from funders. If you’re looking for finance, makes sure you answer your calls and provide any information you can as quickly as possible.

Purchase order finance requirements

If you want to finance purchase orders in your business, there are a few things you need to do in order to begin the process:

You’ll need the following:

  • A registered company with the CIPC. You’ll need the associated registration document, business name and registration number
  • The purchase order from a reputable company or government department
  • A quotation from the supplier of the goods you are providing (including if your company is doing it)
  • Tax clearance certificate (sometimes not required)
  • ID documents of all director’s of the company

Thankfully, there is an easy way to find the best purchase order funding opportunity for your business, thanks to FundingHub. Making it an easy and convenient process for business-owners, FundingHub allows you to apply for purchase order financing by submitting your company details, information on the value of your purchase order, your annual company turnover, and include your CIPC-issued business registration number.

You will then receive quotes and interest form potential finance companies, where you can then compare and find the best offer that suits your business and operations.

Why would you need purchase order financing?

Often small companies (or even larger-sized ones) who may have received an order or have been requested to provide a product, stock, service, or resource that may be out of their scope, will likely look to purchase orders financing. This is to avoid letting the client down, while also using the opportunity and secured order to grow the company.

So, if you’re a small-to-medium sized business which requires capital or cash funding in order to fulfill an order from a client or customer, purchase order financing could be for you.

This of course is delivered in the form of a loan, which will help bridge the gap between the initial order and your company providing and fulfilling the order. These purchase order financing opportunities allow smaller businesses to accept or seek larger deals in order to help them grow.

So, should you consider purchase order financing?

If you’re a relatively new company and have the cash flow to meet the stock or product demands of your clients or customers, then there’s no need for purchase order funding.

However, if you’re in a similar position but are receiving orders that you just can’t fulfill due to financial constraints to gain stock from your supplier, then purchase order financing will suit your business. If the demand from a reputable customer is there, you’ll want to capitalise on that interest.

Therefore, explore the purchase order funding options that are available to you and your business.

More Reading

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