Last Updated on October 25, 2023
You’re all set, finally gearing up to sell your products or services after successfully launching your own business. But wait! The lingo’s tripping you up. Pro forma invoices, commercial invoices — it’s like deciphering a foreign language. The confusion is real and not isolated to you; every business owner has a learning curve with accounting-related terminology.
Clarity is just around the corner. Understanding the difference between a pro forma invoice and a commercial invoice is key to ensuring efficient and accurate business transactions. In this piece, we’ll methodically break down the distinctions between a pro forma invoice vs. commercial invoice, providing you with the knowledge to confidently manage overseas shipments or engage with suppliers.
What Is a Pro Forma Invoice?
While you may not be familiar with the term “pro forma invoice,” it’s not as daunting as it sounds. A pro forma invoice is nothing more than a preliminary bill of sale sent to buyers before the delivery of goods or services. Sometimes, buyers may even require a pro forma invoice, particularly for international transactions.
While it looks like a standard invoice, it’s not what you’d expect from one. It’s more like a commitment than a final sale; it gives your customers a sneak peek into what they can expect to pay and presents an opportunity for the buyer to negotiate terms prior to receiving the shipment and final invoice.
What Is a Pro Forma Invoice Used for?
A pro forma invoice is used as an initial good faith estimate of pricing and transaction details once an order is placed but before it is shipped. Not only does this type of invoice allow the buyer to more easily get purchase approvals, but it also gives the buyer a chance to negotiate terms and conditions prior to finalizing the shipment.
While pro forma invoices can be used in just about every industry, they are particularly helpful in international shipping. They help ensure there aren’t any hiccups or misunderstandings throughout the international transaction that could otherwise lead to late delivery, late payment, and ultimately, cash flow problems for the shipper.
Thus, international shipping is where the pro forma invoice is especially significant. It acts like the blueprint for complex deals, setting expectations and guaranteeing clarity, also being used to acquire additional required items, such as an import permit or a letter of credit in order to pay for the ordered goods.
What Is a Commercial Invoice?
A commercial invoice is, as signified by the International Trade Association, “a required document for the export and import clearance process.” It contains the final bill (presented post-shipment), providing a thorough breakdown of the goods shipped, their value, and the terms of sale.
Not just a piece of paper but a crucial document for both buyers and sellers, the commercial invoice is a keystone of international trade.
What Is a Commercial Invoice Used for?
A commercial invoice has multiple roles—it acts as a request for payment, serves as a document for record-keeping, and provides necessary information for customs clearance.
You’ll most frequently hear of a commercial invoice being referenced in the context of international trade because it is a required document to get your imported goods through customs.
Commercial invoices allow customs officials to assess the transaction, ensure its legality, and calculate duties and taxes.
Pro Forma Invoice vs. Commercial Invoice
So, you’ve got a handle on the basics of pro forma and commercial invoices. But what about those subtleties that differentiate a pro forma invoice for international shipping from its commercial counterpart? Let’s break down these terms in a more digestible manner.
|Criteria||Pro Forma Invoice||Commercial Invoice|
|Purpose||Provides a preliminary estimate of amounts, terms, and items||Acts as both a final bill showing the total amount due and details and as a required customs document|
|Status||Not a legally binding document||A legally binding document essential for payment processing|
|Usage||Sent from the seller to the buyer as a good faith estimate and can be used by the buyer to gain purchase approval, further negotiate the terms of the purchase with the seller, obtain a letter of credit with which to purchase the goods, or acquire an import permit||Sent from the seller to the buyer with the purchased goods and is used to get the goods through customs, acts as a request for payment, and provides a record of the transaction|
|Details Included||May not have all final details, like shipment weight||Comprehensive details including product descriptions, price, and terms|
|Payment Requirement||Doesn’t demand payment because it acts as a good faith estimate||Is a request for payment, which typically much be made by a certain due date|
|Validity||Has a short validity period, might expire if not confirmed||Remains valid as it’s the finalized invoice post-shipment|
Pro Forma Invoice vs. Commercial Invoice FAQs
What does PI mean in shipping?
PI stands for “pro forma invoice” in shipping contexts.
When discussing the meaning of PI in shipping, know that it refers to a preliminary bill highlighting the seller’s intent to deliver products or services without signaling the final demand for payment.
What is the difference between a pre-invoice and an invoice?
The key difference between a pre-invoice and a standard invoice is their usage. A pre-invoice, or pro forma invoice, is a preliminary bill given before shipment or delivery of goods, setting expectations between the buyer and seller. An invoice, on the other hand, is the final bill post-delivery, requesting payment.
How is a pro forma invoice used in international shipping?
A pro forma invoice provides a detailed preview of the goods being shipped and their value. This document sets expectations between the seller and buyer before the final shipment. While it is not a required document for most international shipping transactions (unlike a commercial invoice), a pro forma invoice may be needed to acquire necessary import licenses for certain shipments. Some of the goods that require an import license include cheese, ammunition, and radioactive material. You can review the goods that require an import license in this document from US Customs and Border Protection.
What is a non-commercial invoice?
A non-commercial invoice is a document used for the shipment of gifts, samples, or other items not intended for sale.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.