What Is EDI Billing? Definition, Importance, Benefits, and How to Implement It

Electronic Data Interchange (EDI) is turning the page on how businesses handle transactions, especially for those still relying on paper documents.

EDI automates the exchange of information between companies in various industries, using standardized, digitized document formats that allow businesses to communicate in real time, making supply chain processes faster and more efficient.

A core component of EDI technology is EDI billing software, which enables businesses to send invoices electronically. This removes the need for paper and manual processing, reducing the billing process from weeks to just minutes.

In this guide, we’ll explain what EDI billing is and how implementing EDI billing software can benefit your business.

What Is EDI Billing? Meaning and Examples

EDI billing is the electronic exchange of billing information between businesses. It automates the billing process, which helps reduce mistakes and the need for manual work. This leads to faster data exchange, quicker payments, and smoother transactions.

EDI billing uses standardized formats like EDIFACT (Electronic Data Interchange for Administration, Commerce, and Transport) and ANSI X12 (created by the Accredited Standards Committee X12) to keep things consistent. 

EDIFACT is commonly used around the world, especially in industries like transportation, logistics, and retail. It’s the preferred choice for companies in Europe and other global markets. ANSI X12, on the other hand, is mostly used in North America, particularly in industries like retail, healthcare, and finance. Both formats help businesses exchange data in a reliable and organized way.

The typical EDI billing process follows a few simple steps: It starts with a purchase order, followed by shipping notices, and ends with an EDI invoice (we’ll go over all that in more detail below).

Typical EDI Transactions Comprising an EDI Billing Process

EDI transaction sets are standardized electronic messages that allow businesses to exchange specific types of information, such as purchase orders, invoices, shipping notices, and more. They follow predefined formats, ensuring that both the sender and receiver understand the data in the same way. 

Here are a few transaction sets common to EDI billing processes: 

EDI 850 (Purchase Order)

The EDI 850 starts the entire EDI billing process. Buyers use it to place orders for goods or services, specifying the products, quantities, delivery times, and preferred shipping methods. This document is essential for setting clear expectations between buyers and sellers so that all parties are aligned on the order details before the transaction proceeds.

EDI 810 (Invoice)

This is the electronic version of a paper bill. Sellers send it to buyers to request payment for goods that have been delivered. The EDI 810 follows specific standards, making it easy for different systems to understand the information. It includes details such as the items, shipping information, delivery terms, and payment terms.

EDI 855 (Purchase Order Acknowledgement)

Vendors send this document in response to the buyer’s purchase order. It shows whether the seller can process the order as is or if there are any issues, such as a lack of inventory, pricing discrepancies, or changes in delivery time. 

EDI 856 (Advance Ship Notice)

Suppliers send this document to retailers or distributors to inform them about an upcoming shipment. It includes details like the product being shipped, delivery time, shipping carrier, size, and date of shipment.

EDI 812 (Credit/Debit Adjustment)

Sellers use this document to notify buyers about any changes in the price of goods or services. Reasons for this adjustment might include price differences, over- or under-shipment, or returns.

What Is an EDI Invoice? Meaning and Examples

We’ve already covered how the EDI billing process works and the various transaction sets involved. Now, let’s take a closer look at EDI invoicing— one of the most important components of the billing process.

Key Features of an EDI Invoice

EDI invoices contain many of the same elements as paper invoices but with certain details that are necessary for electronic exchange. 

Every EDI invoice includes:

• A unique three-digit transaction set number 

• Identification details for the buyer, seller, and remittance

• The date the invoice was generated

• Complete order details

• The total amount due

• Any discounts or additional charges applied

• Accepted payment methods and terms

• Applicable tax information

6 Benefits of EDI Billing

EDI billing offers several advantages over traditional paper billing — here are six of the most notable:

Increased Accuracy and Fewer Errors 

EDI helps reduce errors by standardizing and automating the billing process. Since there’s less manual input, invoices are less likely to have mistakes. EDI also makes sure the information is consistent and provides a confirmation when the document is received.

Faster Processing Times

With EDI, businesses can send invoices and get confirmation in minutes, no matter how physically far apart they are. Compared to traditional invoicing, which can take weeks, EDI makes the whole process much quicker and allows for faster reconciliations and delivery.

Cost Savings From Less Paperwork

With no need for physical paper, EDI helps businesses save money while also reducing their carbon footprint. 

Real-Time Visibility

With EDI, businesses can see their transactions in real time, unlike paper-based invoicing. If there’s an issue, businesses can spot it early and fix it quickly before it affects the supply chain.

Enhanced Data Security

EDI keeps sensitive data safe from cyber-attacks and unauthorized access by using secure communication protocols and encryption methods that traditional paper invoices can't offer. 

Better Regulatory Compliance

EDI helps businesses meet industry standards by automating data exchange in a standardized format. This ensures accuracy, secure transmission, confidentiality, and compliance with regulations like EDIFACT, HIPAA, and X12.

How to Implement EDI Billing

Implementing an EDI billing system involves several steps. Here's how the process usually happens:

Selecting an EDI Provider or Software

The first step is choosing a reliable EDI provider to set up your billing system. Look for a provider with experience in your industry, clear pricing, and the ability to scale as your business grows. It's also important to make sure they follow strong security standards and offer training, support, and helpful documentation.

Adding a VAN Provider

While not mandatory, a VAN serves as a secure go-between that helps transmit documents between partners. It’s particularly useful for businesses that need reliable and private communication channels. Be sure to choose a VAN that offers cloud-based solutions (which are scalable, flexible, and accessible from anywhere), can handle high transaction volumes, and uses strong security protocols to protect your data.

Setting Up an Electronic Payment Method

Next, coordinate with your bank or payment processor to connect your EDI system with your preferred payment methods — wire transfers, ACH (Automated Clearing House), or credit cards — so that you receive the funds as quickly as possible.

Implement EDI Mapping 

Mapping your EDI billing software ensures that your system translates data accurately. This process involves defining how billing documents should be formatted and mapped based on your trading partners’ specific preferences and requirements. Customizing the mapping guarantees that all data is exchanged in a way that’s compatible with both systems, preventing errors and delays in the billing process.

Transmitting Billing Files

Once your mapping is set up, you're ready to start transmitting billing files. Depending on your system and your business needs, you can choose from several methods to send data to your business partners:

• APIs (Application Programming Interfaces): These allow different systems to communicate directly and instantly, enabling real-time data transfer.

• VANs (value-added networks): A VAN acts as a secure middleman, providing a reliable and private network for transmitting data between partners.

• Direct connection: This involves a direct link between your system and your partner’s system, offering a fast and secure way to exchange data without relying on third-party networks.

Testing and Validating Billing Files

Before going live, it’s important to test your EDI system to make sure it works as expected. Start by testing the internal processes to verify they generate correct EDI files. Then, test it with your partners to check for accuracy and compatibility.  

How to Create an EDI Invoice

Creating an EDI invoice involves arranging data into specific formats and segments. This data must follow ASCI standards to make sure everything is organized and easy to understand. This standardization allows both the sender and the receiver to read and process the data without errors.

It’s important to know that regular invoicing software can’t create EDI invoices because it doesn’t support the specific formats and standards that EDI transactions use. EDI invoices require specialized software designed to understand and handle the structured, standardized data that allow for smooth communication between different systems.

Most EDI software also provides templates for different types of documents, such as EDI for insurance invoices. These templates help make sure all the necessary information is included in the invoice, reducing the risk of missing details.

The software also handles the data exchange needed to send the invoice. For example, an electronic data interchange insurance invoice is converted from a standard format into the correct EDI format before it’s sent. This ensures that the information stays accurate and formatted correctly when it’s transmitted across systems.

Once the buyer receives the invoice, their system sends back one of these three documents:

• Remittance Advice (EDI 820)

• Text Message (EDI 864)

• Functional Acknowledgement (EDI 997)

After the invoice is processed, the buyer sends it to their accounting department to start the payment process.

Optimize Your Cash Flow with EDI Billing

Integrating an EDI billing system makes receiving payments faster and easier. It cuts down on errors, speeds up transactions, and saves your business money by automating the entire process.

If you're ready to modernize your approach to billing and get paid faster, an EDI solution is the way to go. Connect with an EDI expert today to learn more.