Proforma invoice

What Is a Proforma Invoice?

A proforma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or delivery of goods. Typically, it provides a description of the purchased items, their value, and other key details. However, it's important to note that a proforma invoice is not a demand for payment. Instead, it's more of a negotiation tool or a formal estimate that outlines the terms of the sale and is often used for customs purposes in international trade.

Proforma Invoice in Financial Factoring

When we talk about financial factoring, a proforma invoice plays a unique role. Factoring companies use the detailed information on the proforma invoice to assess the creditworthiness of your buyers before agreeing to advance you money. Essentially, it's one of the documents that can kickstart the factoring process. A business will issue a proforma invoice, which can then be used to demonstrate a future inflow of cash, making it easier to secure immediate funding from a factor.

How Does a Proforma Invoice Work?

In the context of factoring, after you issue a proforma invoice to your client, and they accept the terms, you can sell the invoice to a factoring company. The factoring company typically pays you a significant percentage of the invoice upfront. This way, you get immediate access to cash for your business's operational needs. Later, once the client pays the invoice, the factoring company collects the payment and releases the remaining balance to you, minus their fee.

The Importance of a Proforma Invoice

The proforma invoice serves several critical functions. It clarifies the transaction for both the seller and buyer before the final sale happens. In international trade, it's crucial for declaring the value of goods for customs. For businesses looking to maintain cash flow through factoring, it provides a clear, expected income figure which the factoring company relies on to advance funds.

Key Takeaways

To summarize, a proforma invoice sets the stage for a sale and is integral in the supply chain and financial factoring arrangements. By showing what is expected to be paid, it helps businesses and factoring companies make informed decisions. It is an essential document for trading, negotiation, and accessing immediate funds through the factoring of receivables.