Description of a Pro Forma Invoice

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A proforma invoice provides a quotation for a possible sale or export transaction. It is not a binding agreement until the buyer has signed the invoice indicating that he agrees with all of the terms of the deal. Once the proforma is signed, the terms cannot be changed without the buyer's consent.

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Uses of Proforma Invoices

Proforma invoices are common in importing and exporting because they eliminate many of the uncertainties involved in transactions between countries. The type of currency to be used for payment, shipping method, and shipping costs all must be detailed on the invoice. This also helps governmental agencies inspect and approve the goods being shipped and the shipment method.

Information That Must Be Listed

The invoice must clearly be labeled as a proforma to avoid confusion with the final invoice that indicates payment is due. The exporter's name, physical address, and contact information should be listed, along with the importer's information and desired shipping location. The proforma invoice should be dated, especially if the price of the goods is being negotiated. This makes it easy to distinguish between a current quote and an outdated one. In order to be a binding agreement, the proforma invoice must be signed by both parties involved in the transaction.

Benefits

A proforma is written up in the same format as the final commercial invoice, ensuring that all pertinent terms have been agreed upon before the transaction takes place. This also simplifies the approval and payment process once the transaction is completed because it is easy to compare the terms of the final invoice with the proforma to make sure nothing has been changed or omitted.

Negotiating Through Proforma Invoices

The proforma invoice format provides a common ground for the two sides to work from. Each party can review the terms of the proforma and ask for concessions on specific items by noting the adjustment on the proforma and sending it back to the other side. This also gives the parties a chance to clear up any vague terms before any money or goods change hands.

Significance

Banks will often accept a proforma invoice as a binding document to issue a letter of credit for the importer. A proforma invoice may also be part of the required documentation when applying for an import license. If a contract is required for an inspection prior to export, the proforma invoice can be used as proof of a negotiated agreement for shipment.

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