Are you a small business owner based in India? How aware are you about the important docu- ments required for small businesses? Do you know what a pro forma invoice is? Especially for SMEs in India, having correct documents is very important for their success. One such document that is very important is the pro forma invoice.

An MSME owner has to know the importance of a pro forma invoice, if you are someone who is relatively new to doing business and haven’t paid enough attention to the necessary documents you need not worry as we would educate you on everything you must know on proforma invoices through this article.

 

What is a Pro Forma Invoice?

A pro forma invoice is a preliminary commercial document issued by a seller to a buyer before the actual goods or services are provided. It serves as a kind of estimate or forecast of the final invoice, providing details about the expected price, quantity, and terms of sale. Unlike a regular invoice, which is issued after the transaction is complete and represents a legal obligation to pay, a pro forma invoice is not a binding document.

How does a Pro Forma Invoice Help in Getting MSME Loans

If you plan on increasing capital for your business through loans you will have to approach banks or NBFCs (if you are an MSME). In whichever case having your business’s proforma invoice can be useful to get a small business loan approved. Without a doubt it increases your credibility as a business.

1. Shows Future Growth: A proforma invoice highlights the anticipated sales and revenue for your business in the future; by giving the lenders a clear picture of your MSME's financial health and potential it increases their confidence in your venture which increases a chance for loan approval.
2. Supports Loan Eligibility: By showcasing expected cash flow, it can help demonstrate that the MSME has the ability to repay the loan (which reduced risk for the lender)
3. Larger Loan Disbursement: If you are looking for a higher loan amount by showing your strong growth potential you can negotiate a larger amount to be given to your business.
4. Solves Collateral Problem: Not every business is strong asset wise to be able to give collateral in return for a loan. A small business looking to grow further will always struggle when it comes to needing collateral. Your proforma invoice can act as a collateral in such situations. An alternative solution will be approaching an NBFC who can give loans without needing collateral pledge.
5. Streamlines the Loan Process: Lenders may find it easier to evaluate the loan application if they have a clear understanding of the MSME's projected income.

Key points to remember:

• Accuracy: Ensure the proforma invoice is realistic and based on sound financial projections.
• Clarity: Presentation does matter and be very careful to present all the needy information in a very clear and concise manner so that the officials can easily verify the information you submit. This makes the job easier for the document verification teams from the lenders side as well.
• Supporting Documentation: Any extra evidence to support the projections, such as contracts or purchase orders should be highlighted to improve your overall chances.

Conclusion

Pro forma invoices are a valuable tool for Indian SMEs, offering a range of benefits that can contribute to their financial success. But it is also important to be aware that NBFCs are there for small business owners and provide sme loan on unsecured terms. However, before finalizing on which direction to move for financing a business owner should do his/her bit of research and evaluation to decide on what is best for their business as every option in the market is subjective.