Let’s say you have a small to medium-sized business. The business is fairly new and has just signed a large contract for an order with a client, such as a business tender. This is an exciting step in the right direction for your SME!
The only challenge, however, is actually getting hold of the stock you’ve agreed to supply. Perhaps you don’t have the materials in stock or you don’t have the upfront capital to obtain them.
You don’t want to turn away incoming business but you’re stuck unable to procure the stock you need. A bank loan isn’t an option for you, with the fees either being too high or you don’t qualify because your business is too new.
What do you do?
Opting for purchase order funding can help to bridge the gap between your business and the supplies it needs to fulfil your orders.
Do you need purchase order funding, and can anyone qualify for it? Read on to find out.
Defining Purchase Order Funding
In our quick guide to purchase order funding, we outlined what purchase order (PO) funding is and how to apply for it. A business that requires cash flow to fulfil a purchase order will apply with an accredited third-party lender to obtain the funding they need. The lender (known as the PO funder) will then provide the cash flow necessary to complete the transaction on behalf of the business.
The PO funder directly pays for the goods or services ordered by the client or customer. When the client pays for these goods, the funder will get their payment back plus any additional agreed-upon fees.
As a business, you can use this financing either for the supply and delivery of goods or services to clients.
It’s important to understand that PO funding is different to a traditional bank loan. The funds being advanced are working capital, meaning that they aren’t transferred to your personal account, but directly on to the supplier. In this way, a PO funder becomes a partner to your business instead of an external loan provider.
Do You Need PO Financing?
If you run a business and are struggling with cash flow for purchase orders, applying for PO funding could be the solution you need.
There are certain industries that commonly use purchase order funding, including:
- Manufacturing
- Retail
- Wholesalers
- Import/export
However, keep in mind that your business doesn’t need to fall into one of these categories. Any SME from any industry can apply for PO financing!
PO Funding Advantages and Disadvantages
Advantages
Ideal for newer businesses
As a new business, it can be difficult to secure the financing you need. Through PO financing, you can access the funds you need easily, provided you and your supplier are both creditworthy.
Easier to obtain than a bank loan
Tying into the benefit above, applying for PO funding is a quicker and easier process than applying for a loan at a bank. Banks are less likely to grant loans or access to credit to newer businesses because of the risk of a payment default. PO funders are more likely to provide advances as they play a direct role in the handling of the purchase order.
Helps to grow business revenue
Financing your purchase orders can help to grow your business. Fulfilling purchase orders through financing can help you to secure ongoing orders, which expands your operations and grows your business revenue.
Disadvantages
Only covers direct supplier expenses
The purchase order funding you will receive will only cover the immediate costs of obtaining the supplier’s goods or services. It doesn’t extend to over and above costs or other business expenses.
Only covers finished goods
If your business supplies goods, PO funding will only cover goods that are finished and ready for use. Raw materials or goods that need to be further manufactured, assembled or customised are not covered.
Margins are slightly lower with PO funding
Opting for PO funding means you’ll likely need to pay the funder a pre-agreed additional cost, such as a profit share. As a result, your profit from the order will be slightly lower than it would have been if you had directly paid the supplier. However, most businesses wouldn’t be able to pay the order without the help from PO funding and are happy with this arrangement.
Get the Financing You Need From Sourcefin
Sourcefin is a dependable financing partner for small and medium-sized businesses across South Africa. We provide an extensive range of services, including:
- Purchase order funding and cash flow assistance
- Supplier vetting and assessment
- Supplier sourcing and recommendation
- Logistics and delivery advice assistance
We know that when purchase orders come in, time is of the essence. At Sourcefin, we don’t just provide you with the PO funding you need, we work with you as a trusted partner to help secure your success and future-proof your business growth.