What is a Pro Forma Invoice

What are pro forma invoices are and what they are used for.

Pro Forma Invoices Described

The function of a Pro-Forma Invoice is strictly advisory.

Its purpose is to illustrate quantities, descriptions and prices for goods or services for a proposed transaction that has not yet taken place. 

It does not describe any form of liability as acceptance is always optional. "Pro Forma” must be clearly stated on all such invoices.

Pro Forma Invoices and Documentary Credits

There are two principal scenarios where pro forma invoices will be employed. One is in respect of a transaction where settlement is to be conducted by way of a documentary credit such as a letter of credit or a bill of exchange.

Inthe case of such transactions the pro forma invoice does not require payment before delivery can be undertaken; that will be a separate matter to be agreed between the buyer and the seller.

In the case of a letter of credit the buyer's liability can only be that as described in the pro forma invoice. The provider of the goods or services may not subsequently amend any detail of it including the prices quoted.

Payment in Advance of Delivery

Where trade transactions are undertaken in the absence of either a letter of credit or credit facilities, providers of goods or services might require payment in advance of delivery.

This will also call for the use of a pro forma invoice where either previous credit facilities are not forthcomong  or if credit checks for a new trade customer have not yet been completed.

In this case the pro forma invoice serves as a description of what is required to be paid if the seller is to undertake a delivery. It is then up to the potential buyer to decide whether to accept it or not.

Pro Forma and Buyers' Rights

The main difference between transactions for letters of credit and anything else is that if the final invoice in respect of a delivery against a letter of credit does not correspond with the pro forma invoice, the customer has the right to entirely repudiate the contract.

Pro forma invoices usually set a time limit for acceptance.

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