Proforma Invoice: Definition, Uses, and Its Role in International Trade

International trade being done on a large scale requires a lot of documentation throughout the whole process. One important document that plays a vital role in ensuring transparency between a buyer and a seller is the proforma invoice. A proforma invoice may sound like any other invoice that a seller issues to a buyer, but it is way different due to its nature and its role. In today’s article, we will dive deeper into the definition of a proforma invoice, along with its uses and how it is different from other invoices.

What Is a Proforma Invoice?

A proforma invoice is basically an estimated invoice that a seller issues to the buyer. This invoice is issued to the buyer before the shipment of goods. Hence, it serves as a detailed quotation and helps to confirm the transaction as it outlines the terms, cost and other specifications. 

However, contrary to a commercial invoice or a final invoice, a proforma invoice is not legally binding, and no payment is required after it is issued. To explain more simply, a proforma invoice is created by the seller to provide clarity and details about the transaction before making the deal final. This invoice helps both parties, the buyer and the seller, to be on the same page regarding every aspect of the trade.

Key Features of a Proforma Invoice

Not Legally Binding

As there is no need to make payment, the proforma invoice is not legally enforceable. Hence, there are no legal consequences. The buyer does not make any payment after the pro forma invoices are issued; only final invoices require payment and have legal consequences. 

Preliminary Document

A proforma invoice is an initial plan laid out by the seller to the buyer. It contains information about the trade, such as the cost, the shipping requirement, product, prices, quantities, and the terms of delivery. It is merely a starting point of the negotiations where the legal parties are not bound to make any transaction.

It helps in understanding expenses. A proforma invoice states the vital information about the goods from the sellers to the buyer. It helps the buyer determine the approximate cost that they will have to pay if the transaction goes further.

Offers Customisation

Commercial invoices or final invoices are final, and no changes can be made to them. However, a pro forma invoice is customisable, meaning that various aspects of the transaction can be adjusted to the buyer’s requirements. It offers a standpoint for negotiation between the buyer and the seller.

Different Uses of a Proforma Invoice

Price Negotiation

A proforma invoice document acts as an initial plan that is created by the seller and sent out to the buyer for confirmation. After reviewing the details mentioned in the quotation or a proforma invoice, the buyer can then decide to negotiate the price and other terms of trade before finalising the deal.

Obtaining Export-Import Licenses

When it comes to international trade, several countries require specific export licenses. As the proforma provides more exhaustive information about the type of goods that are to be shipped, it can help facilitate the approval of import or export licenses.

Custom Clearance

A proforma invoice has all the details that are necessary, and it can help the customs authorities estimate the shipment value. The prior estimation of the shipment value can help with smooth processing and pre-clearance.

Financing and Insurance

Since a pro forma invoice can provide detailed information and estimated freight charges, it can help the buyer arrange for financing. The details on the proforma can also help you get insurance, as they offer creditworthiness. 

Ensures Mutual Agreement

A seller can outline the transaction specifics in the proforma. If the buyer does not agree with any terms, they can be negotiated before creating the final invoice. This reduces the risk of dispute once that transaction is in motion.

Also Read – Difference Between Consignor and Consignee and Certificate of Conformity in Global Trade

Proforma Invoice vs Invoice: Key Differences

A proforma invoice may sound similar to a standard invoice. However, they are different. Below are the key differences between commercial and proforma invoices.

Comparison Aspect	Proforma Invoice	Commercial Invoice
Purpose	The purpose of a proforma invoice is to provide an estimate or a quotation to the buyer	The purpose of a commercial invoice is to raise the request for the payment of goods or services
Legal status	A Proforma invoice is not a legally binding document	A commercial invoice is a legally binding document
Timing	It is issued before the transaction is final	It is issued after the services are delivered
Financial records	Proforma in-voice is not recorded in the accounting books	A commercial invoice is recorded in the financial accounting
Payment	No payment is requested	Payment is mandatory
Uses	It is used to obtain import export licence and for customs pre-clearance	It is a must to get customs clearance
Information	A pro forma invoice contains details like the estimated cost and quantity of the goods to be transported along with the terms of sale, which is negotiable	It includes the actual cost of the goods and the finalised terms of sale

Proforma Invoice vs Tax Invoice: Difference 

A proforma invoice is significantly different from a tax invoice in multiple aspects. Below is the differentiation between proforma invoice and tax invoice:

Comparison Aspect	Proforma Invoice	Tax Invoice
Purpose	The purpose of a proforma invoice is to provide an estimate or a quotation to the buyer	A tax invoice is a document that reflects the applicable taxes
Legal status	It cannot be used to claim input tax credits	It is used for tax purposes and credits
Taxes	It may or may not include tax details	The applicable taxes are mentioned in detail

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Suggested – What is the Order to Cash Process in Logistics?

Conclusion

A proforma invoice is a necessary document that is required in both domestic and international trade. It helps facilitate trade negotiations and customs clearance. It is a point of negotiation for buyers and sellers, where sellers can put down their requisites, and buyers can negotiate the terms that they are comfortable with. Exporters need to understand how to create an accurate pro forma invoice so that they can build trust with buyers and ensure smooth transactions. 

Also check – FCA vs FOB: Key Differences in Shipping Terms

FAQs About Proforma Invoice

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