Proforma Invoice Finance: Funding Future Sales

Proforma invoice finance is a specialized funding solution that provides businesses with access to capital before they've even shipped their goods or delivered their services. Unlike traditional invoice finance, which is based on issued invoices, proforma finance uses projected or anticipated sales (represented by proforma invoices) as collateral.

A proforma invoice is essentially a preliminary bill of sale, outlining the agreed-upon products, services, quantities, prices, and other relevant details of a future transaction. While it's not a legally binding document for payment, it serves as a firm commitment from the buyer and a basis for the seller to seek funding.

How Proforma Invoice Finance Works

1. Proforma Invoice Generation: The supplier (seller) creates a proforma invoice for an upcoming order, outlining the terms of the sale.
2. Financing Application: The supplier submits the proforma invoice, along with other supporting documents (like purchase orders, contracts, and business financials), to a finance provider.
3. Due Diligence: The finance provider assesses the creditworthiness of both the supplier and the buyer, evaluates the reliability of the proforma invoice, and considers the overall risk of the transaction.
4. Funding Release: If approved, the finance provider advances a percentage (typically 70-90%) of the proforma invoice value to the supplier. This provides the supplier with the working capital needed to fulfill the order.
5. Order Fulfillment and Invoice Issuance: The supplier fulfills the order and ships the goods or delivers the services. A standard, legally binding invoice is then issued to the buyer.
6. Payment and Reconciliation: The buyer pays the full invoice amount to either the supplier or directly to the finance provider (depending on the agreed-upon structure). The finance provider then deducts their fees and the initial advance, releasing the remaining balance to the supplier.

Benefits of Proforma Invoice Finance

• Increased Working Capital: Provides immediate access to funds, enabling businesses to accept larger orders and grow their sales.
• Order Fulfillment Capability: Allows businesses to procure raw materials, cover production costs, and manage other expenses related to fulfilling the order.
• Reduced Cash Flow Constraints: Alleviates cash flow pressures, particularly for businesses with long production cycles or those selling to customers with extended payment terms.
• Competitive Advantage: Enables businesses to offer more competitive pricing and attract new customers.
• Mitigated Risk: Some finance providers offer credit protection, reducing the risk of non-payment from the buyer.

Considerations

Proforma invoice finance is generally more expensive than traditional invoice finance due to the higher risk involved. The finance provider assumes the risk that the order may not be fulfilled or that the buyer may not pay. Therefore, businesses should carefully weigh the costs and benefits before pursuing this type of financing.

Also, it's crucial to choose a reputable finance provider with experience in proforma invoice finance and a thorough understanding of the industry. Thorough due diligence and clear communication are essential for a successful proforma invoice finance arrangement.