Tender finance also known as purchase order funding “PO funding” is a form of funding used to enable small businesses to fulfil an order(s) that has been successfully awarded to them by government or large corporates. The process of tendering gives opportunities to businesses to bid for projects or services to supply certain goods and services at a quoted price.
Purchase order descriptions vary from:
Supply and delivery of goods –no experience required to execute these type of orders; and
Supply of services such as construction, installation, manufacturing, facilitation and labour requirements – experience is required for these types of orders especially in construction, installation and manufacturing.
Businesses awarded orders for supply and delivery of goods are businesses generally without trading history or capital to procure goods on behalf of their customer/s. The need for tender financing arises from a gap to assist micro/small businesses that have no or limited financial capacity to execute on the PO awarded.
PO funders in South Africa are mostly alternative lenders that understand the frustration of businesses awarded POs without the finance to deliver on them. This will lead to the PO being cancelled when the delivery time lapses. Generally, traditional lenders decline funding to businesses without the required trading history and without sufficient financial documents or collateral.
Some lenders have come to the aid of small business – they realise that a signed PO is a contractual agreement that the customer will pay out an agreed amount when goods have been received from the supplying business. This gives the lender a certain level of comfort that the loan is covered by the PO.
The 7 Steps of Purchase Order Lending
PO lenders will fund the purchase of goods required by the customer on behalf of the awarded business in the following steps:
Step 1 - Borrower applies for funding by submitting all the required documents:
Valid purchase order;
Supplier quotation from a reputable supplier;
Bank statement or bank confirmation letter;
ID of all directors; and
Any other FICA documents requested by the lender.
Step 2 – Due diligence conducted including credit vetting
The lender verifies that the order is valid and performs due diligence on the borrower, customer (issuer of the PO) and supplier as the level of fraud in this sector is very high. When the lender is satisfied with all the information collected from the borrower and the due diligence exercise, a quotation will be sent to the borrower detailing the costs related to the funding.
Step 3 - Signing of lender quotation
Once the borrower signs the lender’s quote, the lender will secure the transaction by opening an escrow account and ceding the proceeds of the order to it.
Step 4 – Opening of escrow account and updating banking details with the customer
As a condition of approval of the loan, an escrow account will be opened and banking details updated on the customer’s (PO issuer’s) payment system.
An escrow account, in tender financing terms, is a bank account opened under the borrower’s name with all the directors of the business being signatories on the account, including the lender. An escrow account differs from other joint bank accounts and ordinary bank accounts because the lender is the only authorised signatory with transacting powers. The other signatories will have viewing rights only and receive notification when payments are made into the account. The purpose of the escrow account is for the lender to collect the proceeds of the order funded in order to settle the borrower’s loan.
An escrow account is beneficial to the borrower as the account is under the borrower’s name and may be used for financial statement purposes. Borrowers in the construction space can use statements of escrow accounts to apply for Construction Industry Development Board (CIDB) grading.
Step 5- Signing of legal agreements
Once the customer confirms in writing that banking details have been updated to the escrow accounts details, an agreement will be signed between the lender and borrower.
Step 6 - Disbursements
The lender verifies the availability of stock and banking details of the supplier and pays directly to the supplier’s account. This is to reduce the risk of misappropriation of funds by the borrower. Goods will be delivered to the customer and an invoice is submitted by the borrower to the customer.
Step 7 - Collection/settlement
Payment terms for most POs are 30-60 days from invoice date. The customer pays proceeds into the escrow account. The lender deducts the loan amount (capital and service fees/ interest) and the remaining funds (profit of the borrower) will be transferred to the borrower’s primary bank account.
Generally, the turnaround time for PO funding is 7-14 days depending on the availability of documents requested by the lender and the time it takes to update the banking details on the customer’s system.
FundingHub has several PO lenders on its portal so if you have a PO and require funding, please visit contact us so that we can assist you to get competitive quotes.