Purchase order funding vs invoice discounting: which does your SMME need?
Purchase order funding pays your supplier so you can deliver a confirmed order. Invoice discounting unlocks cash from invoices already issued. Compared here.
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Purchase order funding and invoice discounting solve cash flow problems at opposite ends of a deal. Purchase order funding pays your supplier so you can fulfil a confirmed order you cannot yet afford to deliver. Invoice discounting advances cash against an invoice you have already issued and are waiting to be paid on.
Key takeaways
- Purchase order funding comes before delivery, invoice discounting comes after it.
- Purchase order funding covers 100% of the cost to fulfil the order. Invoice discounting advances up to 75% of the invoice value.
- Neither needs separate collateral – the order or the invoice is the security.
- You repay when you are paid, not on a fixed monthly instalment.
- The two work in sequence: fund the delivery, then discount the invoice it produces.
Maintaining steady cash flow is critical for small, medium and micro enterprises (SMMEs). Whether you need funds to fulfil a purchase order or to unlock cash tied up in unpaid invoices, the right type of funding – and the right funding partner – makes the difference between delivering and turning work away.
This guide compares purchase order funding and invoice discounting so you can work out which fits your business, and when each one applies.
What is purchase order funding?
Purchase order funding, also called PO financing or tender funding, helps businesses fulfil large customer orders. The funder covers the cost of the goods so you can deliver the order. It suits SMMEs that lack working capital but have received a significant purchase order.
How purchase order funding works
- You receive a purchase order from your customer.
- You approach a purchase order funding partner, like Sourcefin, to fund it.
- The funding partner pays your supplier directly.
- You deliver the goods, and once your customer pays, you settle with the funding partner and their fees.
Benefits of purchase order funding with Sourcefin
It is not a conventional loan. Funding is advanced on the back of the purchase order itself, so there is no separate collateral to put up, and you settle once your client pays you rather than servicing an instalment before any cash has arrived.
Flexibility. It lets SMMEs take on larger work without holding the capital upfront.
Quick turnaround. Your client has a delivery deadline. Once the purchase order is verified, we move to get your supplier paid so you can meet it.
End-to-end logistical support. With Sourcefin you get more than funding. We find the supplier, match the goods to the purchase order, and keep the process moving so the order is delivered on time.
What is invoice discounting?
Invoice discounting lets SMMEs unlock cash tied up in unpaid invoices. It is useful when your customers work on extended payment terms of 30, 60 or 90 days.
How invoice discounting works
- You complete the work and issue an invoice, then discover payment is 30 days away.
- You approach an invoice discounting partner, like Sourcefin, to fund the invoice.
- The partner advances a portion of the invoice value. Sourcefin advances up to 75%.
- You settle when your client pays you.
Benefits of invoice discounting with Sourcefin
Improved cash flow. Fast access to cash covers operational expenses, payroll, or the next opportunity, instead of leaving the money stranded in an unpaid invoice.
No separate collateral. The unpaid invoice is the security, which makes it workable for SMMEs without assets to pledge.
Comprehensive support. Our specialists validate the invoice and follow up with your client to confirm approval, so payment after delivery is not left to chance.
Purchase order funding vs invoice discounting compared
| Purchase order funding | Invoice discounting | |
|---|---|---|
| Amount advanced | 100% of the cost to fulfil the order | Up to 75% of the invoice value |
| Cost basis | A profit share split | An interest rate |
| Repayment | You pay when you are paid for the order | You pay when the invoice is paid |
| Best for | SMMEs needing working capital to fulfil large orders | SMMEs with outstanding invoices that need cash now |
| When to use it | When you win a large order or tender and need funding to deliver it | After invoicing a client on extended payment terms |
Which one does your business need?
The question is simply where the cash gap sits.
- Purchase order funding is right if you need working capital to fulfil a confirmed customer order or tender but cannot yet pay your suppliers.
- Invoice discounting is right if the work is done, the invoice is issued, and you need the cash before the payment terms run out – while keeping your client relationship intact.
They are not competing options so much as consecutive ones. Fund the delivery, then discount the invoice that delivery produces. If you are weighing purchase order funding against a term loan, our comparison of purchase order funding and a bank loan covers that decision separately.
Both are practical tools for improving cash flow and supporting growth, particularly for South African SMMEs without easy access to traditional funding. Apply for funding and we will tell you which one fits.
Sources & references
- National Treasury – public sector procurement and payment terms
- South African Reserve Bank – domestic credit conditions
Frequently asked questions
What is the difference between purchase order funding and invoice discounting?
Purchase order funding is used before you deliver: the funder pays your supplier so you can fulfil a confirmed order. Invoice discounting is used after you deliver: it advances cash against an invoice you have already issued. The trigger is the difference – a purchase order in one case, an unpaid invoice in the other.
Can you use purchase order funding and invoice discounting together?
Yes, and they follow on from each other naturally. Purchase order funding covers the cost of delivering the order, and once the order is delivered and invoiced, invoice discounting can unlock the cash from that invoice while you wait out the payment terms. Sourcefin can arrange both.
Does purchase order funding require collateral?
Purchase order funding is advanced against the purchase order itself, so it does not require separate assets as collateral. That is what makes it accessible to SMMEs with a confirmed order but no balance sheet to pledge. Approval rests on the strength of the order and the customer behind it.
How much of an invoice can you get with invoice discounting?
Sourcefin advances up to 75% of the invoice value. The balance, less fees, follows once your client settles the invoice. The exact advance depends on the invoice, the client and the payment terms, which is why the invoice is validated with your client before funds are released.
Which is better for an SMME that has just won a tender?
Purchase order funding suits a newly won tender, because the cost sits ahead of you: suppliers need paying before you can deliver. Invoice discounting only becomes relevant afterwards, once the work is delivered and invoiced and you are waiting on payment terms of 30, 60 or 90 days.
Sourcefin is a South African alternative finance provider that offers purchase order funding and invoice discounting to SMMEs, enabling businesses to fulfil confirmed purchase orders or tenders and unlock cash flow without collateral. Unlike traditional lenders or banks, Sourcefin also provides end-to-end support including supplier sourcing, logistics, project management, and risk oversight.
