Pro Forma Invoice

A pro forma invoice is a preliminary invoice that a seller issues before a sale is finalized or before goods are shipped. It sets out what the seller proposes to deliver: a description of the goods, quantities, unit prices, the currency, delivery terms, payment terms and an estimated shipping date. It is not a demand for payment in the accounting sense and is not booked as a receivable, but it gives the buyer a firm document to approve, to pay a deposit against, or to present to banks and authorities that need evidence of the coming transaction.

The Latin phrase pro forma means "as a matter of form". In international trade the document sits between a quotation and the final commercial invoice, and it is one of the first papers in a trail that later includes the packing list and the bill of lading.

There is no single legal format, but a usable pro forma invoice in cross-border trade normally includes:

• Names and addresses of seller and buyer, and a reference number and date.
• A description of each item, with quantity, unit price and total value, and often the tariff classification code.
• The currency of the price and, where relevant, how exchange differences will be handled.
• The delivery term, usually expressed as one of the Incoterms such as FOB or CIF, and the port or place of delivery.
• Payment terms, for example cash in advance, a deposit with the balance on shipment, a letter of credit, or open-account credit, often summarized in agreed supplier payment terms.
• A validity period, after which the price or availability may change.

The pro forma invoice does practical work at several points before goods move:

• Deposits and advance payment: sellers commonly ask for a percentage of the order value up front, and the buyer's bank will want a document showing what the payment is for. The pro forma serves as that evidence and its number is often quoted in the payment reference or payment purpose code field.
• Letters of credit: the buyer uses the pro forma to tell its bank what goods, value and terms the credit should cover, so that the credit matches what the seller expects to present.
• Import licenses and foreign exchange approval: in countries with capital controls, a bank or central bank may require a pro forma invoice before it will sell foreign currency for an import payment or register the transaction.
• Internal approvals and budgeting: a buyer's procurement team can sign off a purchase on a document that already shows freight and expected duties.

The commercial invoice is the final bill. It reflects what was actually shipped, is used by customs to assess duty, and creates the payment obligation in the seller's books. The pro forma reflects what the seller intends to ship and may differ from the final document if quantities or prices change. Customs authorities in many jurisdictions accept a pro forma invoice only in limited cases, such as samples, free goods or temporary imports, and usually require the final commercial invoice to follow.

A pro forma also differs from a simple quotation. A quote is an offer that the buyer may ignore, while a pro forma is usually issued once the buyer has signaled an intention to order, and it is laid out like an invoice so that banks and other third parties can rely on it.

Because a pro forma can be produced without any goods existing, banks treat it with some caution. A payment described as an advance against a pro forma invoice is a known channel for trade-based money laundering and for payment diversion fraud, in which a fraudster sends a convincing invoice carrying altered bank details. Banks and payment firms may therefore check that the counterparty exists, that the price is plausible for the goods described, and that later shipping documents match. Payment providers handling trade flows often build these checks into a trade authenticity verification process as part of wider trade-payment compliance.

A distributor in Kenya orders 2,000 solar lamps from a manufacturer in China at USD 12.50 each, FOB Shenzhen. The manufacturer issues a pro forma invoice for USD 25,000 requiring a 30% deposit and the balance against shipping documents. The distributor's bank uses the pro forma to process the USD 7,500 deposit. When the lamps ship, the manufacturer issues a commercial invoice for the same amount, and the remaining USD 17,500 is paid against it and the bill of lading.