How Does E-Invoicing Work? A Guide for Modern Businesses

In today’s digital-first economy, traditional paper-based invoicing is quickly becoming obsolete. Electronic invoicing or e-invoicing has emerged as a smarter, faster, and more compliant method of billing between businesses, governments, and suppliers.

But how does e-invoicing work, exactly? And why is it becoming mandatory in many countries?

In this blog, we will break down the core components, benefits, and real-world workflows of e-invoicing. We will also look at regulatory frameworks driving adoption and help you assess if your organization is ready to make the switch.

What Is E-Invoicing?

Electronic invoicing (e-invoicing) is the automated digital exchange of invoice data between a supplier and a buyer, often via an intermediary platform. Unlike PDF or scanned invoices sent via email, true e-invoices are structured data files (e.g., XML, UBL) that are generated, transmitted, received, and processed without human intervention.

Key Characteristics of E-Invoices:

• Machine-readable format (not just digital images)
• Automated transmission via secure channels (APIs, EDI, or government platforms)
• Real-time validation against business and tax rules
• Audit trail with timestamps, signatures, and legal evidence

Why Are Businesses Adopting E-Invoicing?

There are three primary drivers:

1. Efficiency – E-invoicing reduces manual entry, processing time, and invoice errors.
2. Cost Savings – Studies show savings of 60–80% per invoice compared to paper-based processes.
3. Compliance – Governments in over 80 countries now mandate e-invoicing to reduce tax evasion and streamline VAT/GST collection.

How Does E-Invoicing Work? Step-by-Step

Understanding how e-invoicing works involves looking at the end-to-end process from invoice creation to archiving.

Step 1: Invoice Creation

The process starts in the supplier’s ERP, accounting, or billing system. The invoice is created digitally with all required fields, including:

• Invoice number
• Customer information
• Line items and tax breakdowns
• Payment terms
• Unique identifiers (e.g., PEPPOL ID, GSTIN)

This invoice is exported in a structured format such as:

• XML
• UBL (Universal Business Language)
• EDIFACT
• JSON

The key here is that the invoice is not just a PDF—it’s machine-readable data that can be parsed by other systems.

Step 2: Validation and Formatting

Before submission, the invoice data is:

• Validated for completeness and formatting (e.g., are tax fields correct?)
• Mapped to meet the buyer’s system or regulatory schema
• Digitally signed (in some jurisdictions) to guarantee authenticity

Step 3: Transmission

The invoice is then transmitted to the buyer via:

• E-invoicing networks (e.g., PEPPOL, EESPA)
• Government platforms (e.g., SDI in Italy, IRP in India)
• EDI (Electronic Data Interchange)
• API-based direct connections

In some countries, the government acts as a “clearance” point, validating and storing the invoice before forwarding it to the buyer.

Step 4: Buyer Processing

The buyer’s system automatically ingests the invoice data and:

• Cross-checks it against purchase orders or contracts (3-way match)
• Flags discrepancies for review
• Prepares it for payment processing in AP systems

This step may also include automatic VAT posting and audit logging for compliance.

Step 5: Archiving and Compliance

Both the supplier and the buyer must store the invoice and its audit trail for a legally defined period (5–10 years in most countries). E-invoicing solutions usually offer secure digital archiving with:

• Tamper-proof storage
• Timestamped logs
• Searchable access

Global E-Invoicing Mandates

Understanding how e-invoicing works also means knowing where it’s required by law. Here’s a snapshot of major regions:

These mandates usually follow either a clearance model (invoice approved before reaching the buyer) or a post-audit model (invoice archived and reported after the fact).

Benefits of E-Invoicing

1. Faster Payments

E-invoicing reduces delays in invoice delivery and processing, leading to quicker approvals and on-time payments.

2. Lower Error Rates

Eliminating manual data entry reduces the risk of:

• Duplicate invoices
• Incorrect amounts
• Misrouted documents

3. Cost Efficiency

The cost to process a paper invoice can range from $10–$30. E-invoicing reduces this to $1–$3, according to the Billentis Report.

4. Compliance and Audit Readiness

Most e-invoicing platforms provide built-in tax logic, digital signatures, and time-stamped logs, helping you comply with local VAT/GST regulations.

5. Scalable Automation

With true e-invoicing, your AP/AR workflows become automation-ready, enabling better cash flow forecasting, working capital optimization, and real-time reporting.

Common Misconceptions

1. Isn’t sending a PDF via email the same as e-invoicing?
No. A PDF is not machine-readable and typically requires manual intervention. True e-invoicing involves structured data transmitted system-to-system.

2. Isn’t it just for big companies?
Not anymore. Many governments now require SMBs to comply with e-invoicing standards. Modern SaaS platforms offer affordable, scalable options for smaller firms.

3. It’s only for tax compliance.
Tax compliance is a key driver, but the business benefits, such as automation, speed, and data accuracy, are just as important.

How to Choose an E-Invoicing Solution

When evaluating e-invoicing software or platforms, consider the following:

Is Your Business Ready?

Ask yourself:

• Are you still relying on email or PDF invoices?
• Do you operate in a region with upcoming e-invoicing mandates?
• Are invoice errors causing payment delays or compliance issues?
• Could automation unlock cost savings and better cash flow control?

If you answered yes to any of the above, it’s time to explore an e-invoicing solution.

Final Thoughts

E-invoicing is no longer a “nice-to-have” feature—it’s quickly becoming the standard for B2B and B2G transactions worldwide. By understanding how e-invoicing works and preparing your organization for digital transformation, you can stay compliant, cut costs, and operate more efficiently.

Ready to Embrace E-Invoicing?

At Kolleno, we offer a comprehensive e-invoicing solution designed to help enterprises:

• Stay ahead of compliance mandates
• Eliminate manual errors
• Accelerate payment cycles

Book a demo today to see how we can streamline your billing and accounts receivable processes.