Purchase order funding is easiest to understand by following one deal from start to finish. This walk-through shows who pays whom, at what point, and where the funder takes its fee. If you first want the basics and a list of providers, see what purchase order funding is and where to get it.
The example deal
A small supplier wins a purchase order from a municipality for school furniture worth R500,000, payable 30 days after delivery. Buying the materials and paying a manufacturer will cost R300,000. The supplier does not have R300,000 available.
Step 1: The funder assesses the deal
The supplier sends the funder the purchase order, the supplier quotes, company registration documents, a tax compliance status PIN and evidence of similar work delivered before. The funder looks mostly at three things: is the buyer creditworthy, is the margin large enough, and can this supplier actually deliver? Many funders want a gross margin of at least 20% before they will consider a deal.
Step 2: The funder pays the suppliers directly
Once approved, the funder usually pays the manufacturer and material suppliers directly against their pro forma invoices, rather than handing cash to the business. This protects the funder and keeps the money tied to the order.
Step 3: The business delivers
The supplier delivers the furniture and gets a signed delivery note. This is the point of greatest risk: if goods are late, short or rejected, payment is delayed and the funder’s fees keep running.
Step 4: The client pays, often into a controlled account
The supplier invoices the municipality. Funders commonly require payment into a bank account they control, or a formal cession of the payment, so that they are repaid first.
When the R500,000 arrives, the funder recovers its R300,000 plus its fee and releases the rest to the supplier. Fees are usually a percentage of the funded amount or of the order value, and often increase the longer repayment takes. If this deal carried a fee of R30,000, the supplier would receive R170,000, not the R200,000 margin it would have kept by self-funding.
Where deals go wrong
- Late payment. Government clients often pay late. Ask how fees change if payment takes 60 or 90 days instead of 30.
- Underquoted costs. If materials cost more than quoted, the shortfall is yours.
- Delivery disputes. A rejected delivery can stall payment indefinitely. Get acceptance criteria in writing.
Public sector purchase orders and tenders are advertised on the National Treasury eTender portal. Our comparison of purchase order funding lenders sets out who to approach.
Frequently asked questions
Does the funder pay me directly?
Usually not. Most funders pay your suppliers directly against their invoices.
How is the fee calculated?
Typically as a percentage of the funded amount or order value, often increasing with the length of time until the client pays.
What if my client pays late?
Fees usually continue to run, which reduces your margin. Check the fee terms for late payment before you sign.
Can I use purchase order funding for services?
It is designed mainly for goods. Service contracts are harder to fund because there is nothing tangible to buy and deliver.
How quickly can a deal be funded?
Often within days to a few weeks once documents are complete, which is faster than most bank finance.
Originally published in March 2020. Updated September 2026.
