What is a proforma invoice, and when should you use it?
Invoicing is complicated — particularly as it applies to how and when to send them. Follow this easy-to-use guide to learn more about how pro forma invoices can help your business.
The world of invoicing can be tricky — even more so, the terminology used in the invoicing world is often confusing. If you’ve never heard the term “pro forma invoice” before, don’t sweat it. Dive into this brief (but helpful) guide to give yourself a better understanding of the answer to “What is an invoice?” and how it can benefit you.
What is a proforma invoice, exactly?
A pro forma invoice refers to a type of bill of sale that is sent to someone — a client, an organization, a person, etc. — before the work is completed. This type of invoice can be used for:
- A commitment to goods
- A promise of services
- Internal purchase approval
There are several different uses for these types of invoices, and they have proven to be incredibly helpful for organizations, businesses, and individuals in various industries. As we said, pro forma invoices can be created and used by anyone, but most commonly, they’re used in trade transactions and imports and exports.
Here are a few important proforma invoice facts.
- A pro forma invoice is not a true invoice — think of these as confirmations of commitments, not actual invoices set to be paid upon receipt
- A quote and a pro forma invoice are different — you typically send these when a customer has already committed to working with you
- Using a pro forma invoice can help to get you paid promptly because it lets your clients/customers know what they’ll be paying in advance
Is a proforma invoice legally binding?
A proforma invoice isn’t typically considered legally binding since it’s essentially a preliminary bill of sale sent to the buyers in advance of the delivery of goods. A proforma invoice specifies the goods or services the company will provide or deliver, but it’s important to know that it’s more of an estimate or proposal, and it doesn’t really represent a final bill or demand for payment.
A proforma invoice is typically used for importation customs cases or as a prelude before issuing a commercial invoice. The non-binding nature of a proforma invoice means that the terms and conditions, including prices, can still be changed. It’s also often used as a negotiating tool between the buyer and the seller before the final sale is finished.
Proforma invoice example and when to use one.
There are different times when it’s a good idea to use a proforma invoice. Some of them are:
- Initial offer. When a seller wants to let the buyer know about the products or services as well as their respective prices, they can use a proforma.
- Customs documentation. You can use a proforma invoice to create a customs declaration when you ship goods overseas.
- International trade. A proforma invoice is often used in importing and exporting transactions to declare the total value of goods for customs.
For example, if an American company wants to export merchandise to Spain before they ship the goods, they issue a proforma invoice to their Spanish buyer. This proforma invoice will detail the type of merchandise, the quantity, and the total estimated cost of the goods. This document will help the Spanish buyer secure funding or open a letter of credit and aid when it comes to the importation process.
Proforma invoice vs commercial invoice.
The purpose of a commercial invoice vs a proforma invoice is different.
A proforma invoice is mainly used for providing an estimate or a proposal before the actual transaction takes place. It’s not legally binding since it doesn’t demand payment, and it can also be used for quoting prices, as part of negotiation, or for customs purposes in international trade.
On the other hand, a commercial invoice is used after the sale is completed, as it represents a demand for payment and it details the transaction that took place. This document is legally binding since it’s an official request for payment, and it can also be used as the final bill the seller provides to the buyer.
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