Godknows Hofisi Financing an order or tender
This subject is of interest to many entrepreneurs and business executives. Many businesses, especially small to medium enterprises look forward to improving their situations through trade. At times they have promising business ideas or orders to supply but are frustrated by lack of working capital. It is common to come across someone or a small to medium enterprise with an order or tender to supply certain goods but is thin on finances.

This article gives some tips on how to raise finance to fund an order or tender.

Savings
Depending on your situation it may be ideal to use own funds from savings. However, individuals or small to medium enterprises may not have enough savings to fund the order.

Funding by shareholders
For small to medium enterprises it is quite common for shareholders to inject capital into the business or loan the business some funds to meet funding requirements for an order or tender.

Supplier credit
Where a business has to buy the goods or input materials from a supplier there is merit in negotiating credit supply where possible. This can save a business from paying interest and the rigours associated with the borrowings process, for example. However, this way of raising order finance works well if one or a business has a good name and relations with the supplier. The supplier may or may not ask for security against the credit facility. The debtor should avoid the temptation of not paying the supplier upon being paid by the customer.

Customer deposits
Where possible a business may ask its customers for a deposit or down payment. The funds so received can then be applied towards financing the order.

Borrowings
It is common to borrow in order to finance an order tender. Borrowings take different forms and may include the ones explained below.

Order finance by financial institutions
A business can apply to its bank for order finance. If approved, the bank can for example pay the supplier direct. When the customer eventually pays for the goods supplied the proceeds are transferred into a designated account with the bank that advanced the order finance. The bank recovers its funds including interest first and the balance of the funds will belong to the business.

Overdraft facility
If a business has an overdraft facility with its bank, it can draw down on the facility. When the customer pays into the business’ bank account the overdraft will be cleared.

Bank loan
At times a business may use a simple bank loan to finance an order and repay the loan over an agreed tenure.

Advances by family or friends
It is established practice to borrow from family or friends to finance an order. Usually there is no interest, establishment cost or security. The borrowings can be local or from the diaspora. For example a family member or friend in the diaspora, through an agreed loan, can pay a foreign supplier of goods required to meet a local order.

Borrowings from High Net Worth Individuals (HNWIs)

Individuals or small to medium enterprises may also borrow from HNWIs. The borrower is charged interest or a profit share. The HNWIs may require security in the form of an asset.

Microfinance institutions
Businesses can also borrow from microfinance institutions to finance orders.

Foreign loans
These loans may be obtained from foreign financial institutions directly or through a foreign based family member or friend who has security and verifiable foreign cashflows.

Profit sharing arrangements
A small to medium enterprise with an order or tender to supply but lacking financing may approach person or business with funding and team up. At times this is loosely called “joint venture” or “joint operation” or simply “profit share”.

The parties approached are either bigger businesses or HNWIs or other players in the same industry or type of business. The parties then share the resulting profit in agreed ratios.

Disposal of redundant assets
At times there is merit in disposing of redundant assets and use the proceeds to fund an order or tender especially if significant gain is expected. Assets usually disposed of quickly by owners of small to medium enterprises or the businesses themselves may include motor vehicles or low value properties such as stands.

This article is simplified, for general information only and does not constitute full professional advice.

Godknows Hofisi, LLB(UNISA), B Acc (UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]