What is Purchase Order Funding and How Does It Work?

Small businesses in South Africa often face cash flow challenges when they land big orders. Purchase Order (PO) funding is a cash flow solution that helps you fulfill large orders by financing your supplier costs upfront.

Instead of worrying about where to get money to buy materials or stock, you can approach a PO funding lender who pays your suppliers on your behalf.

In practical terms, purchase order funding bridges the gap between receiving a customer purchase order and getting paid for that order. Here’s how it typically works:

1. You receive a purchase order from your customer. This could be a large retailer or a government tender, for example.
2. Apply for PO funding with a lender. You share the purchase order details and costs with the financier.
3. Lender evaluates and approves funding. The PO funder checks the order size, your customer’s credibility, and profit margin, then agrees to pay your supplier (often covering the cost of goods).
4. Supplier fulfills the order. The lender pays the supplier directly for the goods, and your supplier delivers the product to your customer as required.
5. Customer pays the invoice. Once your customer receives the goods, they pay the invoice under the terms agreed (e.g., 30 days).
6. You repay the lender from the proceeds. The lender will deduct their fees and the funded amount, then pass the remaining balance to you. Essentially, the PO funding is settled when the customer’s payment comes in.

By using PO financing, South African SMEs can take on lucrative orders without having the cash upfront. This form of business funding in South Africa is short-term – it exists only for the duration of that order. It’s not a loan dumped into your account for any use; instead, the funds go straight to your supplier to ensure the order is fulfilled. Once the transaction completes, everyone gets paid, and you keep the profit minus the financing fee.

In summary, purchase order funding allows your business to say “Yes” to big opportunities that you might otherwise have to turn down due to cash flow limitations. It’s a lifeline for SMEs that have sales on the table but lack the working capital to deliver. By leveraging the confirmed purchase order from a reliable customer, you can get the financing needed to cover supply costs and grow your business without stressing your cash reserves.