In today’s fast-paced business environment, maintaining a steady cash flow is critical, especially for small, medium and micro enterprises (SMEs). Whether you need funds to fulfil a purchase order or unlock cash tied up in unpaid invoices, the right type of funding (and funding partner) can make all the difference.
In this guide, we will compare Purchase Order (PO) Funding and Invoice Discounting to help you determine which solution best fits your business needs. We’ll also explore how each option benefits South African SMMEs and how you can easily access these funding solutions.
1. What Is Purchase Order Funding?
Purchase Order Funding, PO Financing or Tender Funding is a tailored financial solution to help businesses fulfil large customer orders. Essentially, the PO funding company, like Sourcefin, provides the funding to cover the cost of goods, allowing businesses to deliver the order. This option is ideal for small businesses that lack sufficient working capital but have received a significant purchase order.
How Does Purchase Order Funding Work?
1. You receive a purchase order from your customer.
2. You approach a PO funding company, like Sourcefin, to finance the purchase order.
3. The funding company pays your supplier directly.
4. You deliver the goods to your customer, and once payment is received, you repay the funding company, along with their fees.
Benefits of Purchase Order Funding with Sourcefin
It’s not a normal loan: You’re not taking on a regular loan so there’s no need to put anything up as collateral since the funding is advanced on the back of the purchase order itself. The best PO funders receive payment once your client pays you. This eliminates the stress of paying an instalment without cash flowing into your account first.
Flexibility: It allows SMMEs to scale without large amounts of capital upfront.
Quick turnaround: We get it – your client has set a deadline for delivery and sometimes it’s hard to meet without the necessary funds. With Sourcefin, once the purchase order is verified, you will have fast access to funds (in as fast as 48 hours).
End-to-end logistical support: With Sourcefin, you get more than just funding. We find the supplier, match the goods to the purchase order, and ensure the whole process is smooth and the order is delivered on time. Sourcefin also offers free specialist support for business processes, finances, and seamless operations to help you grow your business.
2. What Is Invoice Discounting?
Invoice Discounting is a form of funding that enables SMMEs to unlock cash tied up in unpaid invoices. This type of financing is beneficial if your business has extended payment terms (30, 60, 90 days) with customers.
How Invoice Discounting Works
1. You issue an invoice to your customer once you’ve completed their order and find out they’ll only pay in 30 days (yikes).
2. You approach an invoice discounting company, like Sourcefin, to fund the invoice.
3. The invoice discounting company advances you a portion of the invoice. Sourcefin advances up to 75% of the invoice.
4. You pay Sourcefin when your client pays you.
Benefits of Invoice Discounting with Sourcefin
Improved cash flow: Invoice discounting provides your business with fast access to cash, which is essential for covering operational expenses, managing payroll, or taking on new business opportunities. By unlocking the money tied up in unpaid invoices, your business can maintain liquidity and continue to grow.
No need for collateral: Invoice discounting uses the unpaid invoice as security, making it easy for SMMEs to apply for even if they don’t have assets to put down as collateral. Invoice discounting is an accessible and efficient funding solution.
Comprehensive Support: Beyond financing, Sourcefin provides a wealth of resources and expertise to help your SME thrive. When it comes to invoice discounting, our specialists will validate and follow up with your client to ensure your invoice has been approved and that you get paid after delivery. From legal advice to risk mitigation strategies, we’re your trusted partner in growth.
Sourcefin, offers invoice discounting that’s designed to meet the unique needs of South African SMMEs, providing flexible and quick access to funds when you need them most.
Choosing the Right Financing Solution for Your Business
When deciding between purchase order funding and invoice discounting you need to consider the unique needs of your business:
- Purchase Order Funding is ideal if you need funding (working capital) to fulfil a confirmed customer purchase order or tender but lack the cash to pay suppliers.
- Invoice Discounting works well if you need to unlock cash tied up in unpaid invoices while maintaining healthy customer relationships.
| Purchase order funding | Invoice discounting | |
|---|---|---|
|
Loan sum |
100% of the cost to fulfil the order |
Up to 75% of the value of the invoice |
|
Amount due |
Based on a profit share split |
Based on an interest rate |
|
Repayment
|
You pay us only when you get paid for the order
|
You pay us only when the invoice is paid
|
|
Best for
|
SMMEs needing funding (working capital) to fulfil large orders
|
SMMEs with outstanding invoices and need cash
|
|
When to use |
When you receive a big order and need funding (working capital) to fulfil it |
After issuing an invoice, with extended payment terms, to a client
|
Both purchase order funding and invoice discounting are powerful tools for improving cash flow and supporting business expansion, especially for South African SMMEs who may not have access to traditional funding. By partnering with a trusted funding company, like Sourcefin, you can easily access the funding you need – when you need it.
Need Sourcefin funding? Click this link to apply today!
