Do you want to import any products from China or sell anything internationally? You need to know some important technical phrases to survive in this severe competition.
Today, we’re going to focus on two different concepts with similar aspects that many beginners can’t distinguish.
In this blog post, you’ll learn everything about Pro Forma vs. Commercial invoice, two crucial concepts in international trade.
If you want to streamline your invoicing processes and ensure compliance with international procedures, you’d better read the following paragraphs.
In the end, if you have any questions about pro forma or commercial invoices, you can easily contact our team at DDPCH.
What Is a Pro forma Invoice?
A Pro forma invoice is a preliminary bill of sale in international trade. It provides a detailed overview of the goods or services that should be delivered to a customer.
The most important point about a Pro forma invoice is that it’s issued before your sale is finalized.
In this invoice, you outline the terms of the transaction. A Pro forma invoice includes the description and quantity of items, their value, and any other relevant terms or conditions.
The goal of a Pro forma invoice is to provide a preview of what the final invoice will look like. This preview allows both the buyer and seller to focus on the details and confirm them before processing the transaction.
For example, let’s say you have a company based in Europe and want to import electronic gadgets from China. Before the shipment is sent, the seller provides you with a Pro forma invoice detailing the quantity, description, and total value of the gadgets. Of course, any applicable taxes or shipping costs are included in this initial invoice.
You should review the Pro forma invoice to ensure that all the details are correct and then agree to the terms.
Once you and the seller have agreed, the seller will proceed with shipment and issue the final invoice, which is called the Commercial invoice. This process helps you avoid any misunderstanding and have a smooth transaction.
What Is a Commercial Invoice?
A Commercial invoice is a crucial document in international trade. The Commercial invoice is issued after the transaction has been completed and the goods are ready for shipment.
In fact, it’s a formal request for payment and provides detailed information about the goods or services sold. Again, in this invoice, you have detailed information like their products’ description, quantity, price, and terms of sale.
Also, commercial invoices usually include some other essential details such as the seller’s and buyer’s contact information, shipping details, payment terms, and any applicable taxes or duties.
Remember that, it serves as a vital financial document for both the buyer and seller. It finalizes your deal and is the most important document of your trade.
For instance, after the electronic gadgets have been prepared for shipment and dispatched to your country, the seller issues a Commercial invoice. Then, you have to pay based on this invoice.
Pro Forma vs. Commercial Invoices: What’s the Difference
If you want to have a smooth transaction in your international trade, you need to distinguish between Pro forma and Commercial invoices.
Both documents play pivotal roles in transactions. However, they have distinct purposes and have different aspects.
Here at DDPCH, we help you understand the differences between these two invoices. Here are the key differences between Pro forma and Commercial invoices:
Purpose and Use
The goal of each one is completely different:
- Pro forma Invoice: It is primarily an initial document for agreement between the seller and buyer. It outlines the terms of any possible agreement and transaction and provides an overview of the products or services.
- Commercial Invoice: It’s a legally binding document that finalizes the sale. A Commercial invoice is a formal request for payment that includes all the detailed information about the goods/services. It’s also used for customs clearance and keeping a record of your financial activities.
Legal Status
They can’t be compared in terms of law:
- Pro forma Invoice: It actually doesn’t have any importance in terms of legal status, accounting, and tax purposes. It’s just a proposal or an estimation of the price of an order.
- Commercial Invoice: It’s the evidence of the sale and holds legal significance. Remember that it is used for taxation, customs declaration, and as proof of payment.
Role in Payment and Financing
Each of these invoices acts differently in international financing:
- Pro forma Invoice: It just helps both sides obtain necessary approvals on the terms of the deal.
- Commercial Invoice: It’s a crucial document for payment and facilitates the payment process for goods/services mentioned in the invoice.
Timing of Issuance
They’re issued at different stages of a trade:
- Pro forma Invoice: It’s issued before shipment before your sale is finalized. This way, they can confirm all the details before making the goods ready for shipping.
- Commercial Invoice: Issued at the end of the deal and after the goods/services have been delivered/performed. It’s actually the final statement of the transaction.
Customs and Duties
You need to know which one is useful for customs and duties:
- Pro forma Invoice: It’s just for estimating customs duties and taxes, but you can’t use it as an official customs document.
- Commercial Invoice: You can use it for customs clearance purposes and also for importing/exporting your goods across borders.
Modification and Flexibility
Remember that you can’t modify all invoices:
- Pro forma Invoice: You can easily modify or adjust it if you need to.
Commercial Invoice: You can’t modify it because you need to finalize the payment accordingly.
How to Convert Your Pro Forma Invoice Into a Commercial Invoice: step by step
Converting a Pro forma invoice into a Commercial invoice is a crucial step in your trade.
Here at DDPCH, we tried to make it easy for you by providing a step-by-step guide to transition from a Pro forma invoice vs. Commercial invoice:
Step1: Check Your Pro forma Invoice
Begin by carefully reviewing the details of your Pro forma invoice. You need to ensure accuracy and completeness and verify all the details including product descriptions, quantities, prices, and other terms.
Step2: Update Necessary Information
Update any outdated or incorrect information on the Pro forma invoice. For example, take a look at changes in product quantities, pricing adjustments, or modifications to payment terms.
Step3: Add Legal and Shipping Details
Now, you have to add essential legal and shipping details to the Commercial invoice. Remember all the details such as the seller’s and buyer’s legal names and addresses, contact information, and any required tax or registration numbers.
You also need to provide detailed shipping information. It includes the origin and destination addresses, shipping method, and shipping terms.
Step4: Include Payment and Terms
You have to clearly mention the payment terms and conditions on the Commercial invoice. The agreed-upon payment method, currency, and due date should be stated.
Step5: Make It Official
Include all the necessary official markings and declarations that are required for customs clearance. You have to mention the specific invoice number, date of issuance, and a statement that shows it is a Commercial invoice.
Step6: Double-Check Everything
Before finalizing the document, you have to check it again to remove all the errors.
Step7: Send to Customer
After checking everything, securely send the document to the customer. You need to use the channel that is already agreed upon. You have to make sure that the customer receives the Commercial invoice on time.
3 Golden Tips Commercial Invoice & Pro Forma Invoice
Last but not least, you have to pay special attention to 3 important tips when it comes to Pro forma invoice vs Commercial invoice:
- Consider Accuracy Your Top Priority: Regardless of your invoice type, accuracy is paramount. Remember that every error in the information can lead to delays or misunderstandings. Also, clear labeling to distinguish Pro forma invoices vs. commercial invoices is important.
- Get Familiar with the Latest Regulations: You need to make sure that the Commercial invoice complies with all relevant regulations and requirements. Both local and international regulations are important when you issue an invoice.
- Make Sure You Use Proper Communication: When finalizing the invoices, you have to make sure that everything is clear. If you don’t communicate your purpose properly, the other side might misunderstand it, leading to legal issues.
Conclusion
Using the right invoice is essential in international trade. It’s crucial for clear communication and smooth deals. Now, you have no more invoice confusion! We tried to help you distinguish between pro forma and commercial invoices. You’ve learned key differences and therefore, you can easily decide which one is suitable for you. In summary, Pro forma invoices are good for negotiations and setting expectations. On the other hand, commercial invoices are the official documentation for transactions that are completed. If you still need help determining which invoice type is appropriate for a specific situation, do not hesitate to contact our team at DDPCH.
FAQs
Here are common questions people ask about Pro forma invoice vs. commercial invoice:
What’s the main difference between a pro forma and a commercial invoice?
A pro forma invoice is a proposal that you can use to reach an agreement with the customer. On the other hand, a commercial invoice is an official document for finalizing transactions.
When should I use a pro forma invoice?
Use a pro forma invoice before your sale is finalized. Use it to provide an estimate to your customer, request a deposit, or start discussions about pricing and terms.