What is an Invoice? 13 Different Types & How To Use Them

No matter which industry you are in, if you are running a business, then managing an invoice is an essential aspect that you must know about.

In this article, we will help explain what an invoice is, how it works, what to include on an invoice, which types of invoice to use and provide some recommendations on invoicing best practices.

What is an Invoice?

An invoice is a document issued by a seller to a buyer to request payment for the products or services provided. It records products or service details, units, corresponding costs, the total amount due, and the terms and conditions agreed upon by both the seller and the buyer.  

Different types of invoices serve a variety of purposes across various industries and contexts, from record-keeping to parts of required custom documents.  Overall, it is an important document in the accounting and auditing system.

An invoice can be sent to customers either before or after the completion of products or services, but in most cases, they are sent after.

🔍 Insight: Customers may sometimes say "bill" when referring to an invoice. While they are technically different documents, it's important to consider the context to better communicate at certain moments.

See our post about the difference between an invoice and a bill to learn more.

Example of an Invoice

Invoices vary depending on the type of invoice and the template being used, but they follow a similar structure and include the same key pieces of information.

Below is an example of a typical invoice.

Let's break down the key details: 

• Seller's information: This includes the company's logo, name, address, business contact information, and registration number.
  
• Buyer's information: This includes the recipient’s name, address, and contact details.
  
• Unique invoice number: This unique number will act as an identifier that helps keep track of all invoices. It can be composed entirely of numbers, letters, special characters, or a combination of everything. Any numbering system can be used as long as it is consistent.
  
• Invoice date: This is the date when the invoice is issued (not the date of goods or services rendered), which may be linked to the payment due date, for example, a payment may be required within 30 days from the invoice date.
  
• Date of products and services provided: This is the actual date when the products or services are delivered. Depending on the business model, this date may be different from the invoice date. For example, if you bill your clients at the end of the month for work done throughout the month, you should list the dates of each task or milestone completed within the month.
  
• Products and services descriptions: This includes the name, quantity, price per unit, etc. Provide as much detail as possible to ensure that your customers know what they're paying for and can verify that everything is correct.
  
• Tax and discount information: details of any applicable discounts, taxes, or fees.
  
• The total amount charged: The final amount after factoring in all discounts, taxes, and fees.
  
• Payment due date: This is the date by which your customer must pay you in full, set based on industry standards, cash flow needs, and customer relationships. Common payment due dates include net 30 (payment due within 30 days of the invoice date), net 15 (payment due within 15 days of the invoice date), or due upon receipt (immediate payment required). 
  
• Payment terms: This includes details about payment methods, currencies, late fees, and other conditions related to the payment process. 

13 Invoice Types And How To Use Them

Different types of invoices serve different purposes and are suitable for different business models. 

Let’s explore the main types of invoices and when to use them

Standard Invoice

A standard invoice is a common form of invoice with a flexible format that fits most industries and billing cycles. It is issued by a business and submitted to a client,  itemizing and legitimizing seller-buyer transactions.

When to use a Standard Invoice:

• When generating an invoice to collect payment in general

Proforma Invoice

A proforma invoice is a document sent to buyers before the actual shipment or delivery of goods. This invoice includes logistic information, product details, estimated cost and other important information, and is used to request preliminary confirmation, or used for custom purposes. 

In essence, it gives the customer a good-faith estimate of costs and allows the opportunity to negotiate terms. Both sellers and buyers can use a proforma invoice to ensure mutual agreement before finalizing a transaction.

It is worth noting that a proforma invoice does not carry any legal weight and it cannot be used to demand payment. Normally, once an agreement has been reached or the goods have been delivered, the company sends a final invoice with the final cost and descriptions that may differ from the proforma invoice, and it is the final invoice that is legally binding.

This type of invoice is most commonly used in export sales but there are other opportunities to take advantage of it.

When to use a Proforma Invoice:

• When declaring the value of exporting goods to customs 
• When bidding on a project, a proforma invoice can be sent as part of a proposal
• A company that provides services to a foreign client may opt to send a proforma invoice to the client prior to beginning any work

💡 Tip: Read our article Pro Forma Vs Commercial Invoice to learn more about invoices used in international trade.

Retainer Invoice

A retainer invoice is an invoice for future service. Essentially, a retainer invoice requests a client to pay in advance for work that will be done down the line. It's a way of ensuring that services will be available when they are needed, and can be thought of as a deposit or pre-payment. This invoice is often used for professional services like a consultant, advisor, lawyer, etc. 

For example, a lawyer may send a retainer invoice following a retainer agreement to the client, including details such as billing rate, payment method, and refund policy. This helps the lawyer secure a steady income and the client to budget for legal expenses and ensures the lawyer is available for their case. 

The retainer invoice itself does not necessarily hold any legal weight, but it’s often sent with a legally-binding retainer agreement.

When to use a Retainer Invoice:

• When providing professional services 
• When a retainer agreement is in place

Interim Invoice

While working on a large project, interim invoices help divide payments into smaller parts. They are sent at pre-agreed milestones during the project's progress, requesting payment for each completed portion. This ensures cash flow for vendors and avoids burdening the buyer with a hefty sum.

Let’s say a construction company is working on a long-term project, they'll likely send interim invoices instead of waiting until the end to bill the client. 

When to use an Interim Invoice:

• When working on projects that take several months to complete, for example, construction projects, software development projects, and marketing campaigns. 

Recurring Invoice

A recurring invoice is an invoice issued to the same customer for the same amount of money and for the same service at regular intervals. Usually, these invoices are submitted, or the pre-agreed-upon payment is automatically deducted from the customer's account. 

For example, a cleaning service company may send a recurring invoice to its clients every Friday to cover the weekly cleaning service provided.

When to use a Recurring Invoice:

• When the businesses deliver on a regular schedule, like weekly cleaning or quarterly maintenance contracts
• When the business uses a subscription model where the same bill is sent out each period
• When the business requires payment in instalments such as car dealerships

Commercial Invoice

A commercial invoice is an invoice used in international trade by businesses to request payment for goods sold internationally and by customs authorities to determine applicable import duties and taxes, preventing delays or impediments. 

A commercial invoice reflects the final payment for the goods or services sold so it should be issued once all related expenses have been calculated and the job is complete.

When to use a Commercial Invoice:

• When shipping goods internationally and complying with international trade regulations.

🔎 Insight: In countries where it is mandatory to provide a commercial invoice, failure to do so may result in the goods being held at customs or returned to the sender.

However, in some countries with free trade policies, a commercial invoice may not be required.

Credit Invoice

A credit invoice, also known as a credit memo or credit note, is a document used to notify a client that they have the right to receive credit. This may follow invoice errors, customer overpayment, discounts, refunds, or returned items. A credit invoice should be generated to properly record the transaction, regardless of the reasons the credit is offered.

This invoice always displays a negative total amount. For example, if a refund of $20 is issued, the credit invoice would be written as - $20 

When to use a Credit Invoice:

• When there is a refund 
• When any processing errors benefit the client
• When there is an overpayment and credits need to be given back to the customer
• When a customer receives a discount

Debit Invoice

A debit invoice, also known as a debit memo or debit note, is used to add additional charges to the outstanding amount or to make a minor adjustment to the existing invoice. 

When to use a Debit Invoice:

• When the customer increases the quantity of their order
• When a time-based service takes longer than anticipated. However, it's important to first obtain the customer's approval.

Mixed Invoice

A mixed invoice is a single document that includes both debit and credit bills, so the total amount can be either positive or negative.

When to use a Mixed Invoice:

• When you need to decrease the amount a client owes for one project and increase it for another.

Past-due Invoice

A past-due invoice is an unpaid invoice that surpasses its due date. In such cases, the business may choose to reissue the invoice, along with a new due date, late fees or interest if agreed upon in payment terms. 

When to use a Past-due Invoice

• When an invoice isn't paid on time. 

Timesheet Invoice

A timesheet invoice is a hybrid of a timesheet and an invoice, used to document hours worked on a project and detail the amount payable by the client for the work completed. This invoice is commonly used by service-oriented businesses that charge customers for billable hours and is typically implemented throughout the project.

Let's say a consultant works at the standard rate of $150/hour, If hired to work for 20 hours, a consultant can issue a timesheet invoice requesting payment of $3,000.

When to use a Timesheet Invoice

• When providing professional service charged by hours. 

Final Invoice

A final invoice is an invoice with the entire amount payable for products or services rendered, as well as any fee or tax charges. It summarizes the remaining balance after the project or order is completed, which is more complete than the proforma or the interim invoice.

When to use a Final Invoice

• When a project is complete.
• When issuing a final payment agreement after a proforma invoice.

E-invoice

Electronic Invoice is an umbrella term referring to any invoices that are transmitted electronically, regardless of their specific types. 

When to use an E-invoice:

• When an electronic invoice is preferred
• When a business wants the invoice to be conveniently shared among many stakeholders
• When a business uses an automated invoicing system

How To Manage Invoices Effectively

Managing invoices can be a time-consuming process, which is why you must do them correctly. Here, we will provide 7 recommendations on how to manage your invoice effectively.

Use Invoicing Software.

There are several reasons why you should consider using invoicing software to manage your invoices. Some of those reasons are:

• Time efficiency - It saves you from doing manual and repetitive tasks such as creating invoices, calculating totals, sending reminders, and applying taxes or discounts.
• Accuracy - Invoice software can reduce the chances of errors in calculations or data entry.
• Payment tracking - One of the most important features is its ability to track payments and monitor which invoices have been paid and which ones are overdue so you can have an overview look of your cash flow.
• Reporting - Invoice software can generate monthly, quarterly, or annual reports so you can track the performance without having to recollect all the invoices or do the analysis, which takes time.
• Scalability - As the business scales, so does the volume of invoices that will be issued. Using invoice management software will help businesses handle larger client bases without spending too much time on invoicing.

With that said, we have prepared a couple of invoicing tool reviews so you can compare which invoicing tools are right for you.

• PayPal invoice review.
• Finom Review.
• Invoice2go Review.
• Zoho Invoice review.
• ZipBooks review.

Send Out Invoices Promptly.

Sending out invoices promptly after goods are delivered can enhance the chances of timely payments and minimize disputes. Prompt invoicing also helps improve cash flow.

In order to do that, consider:

• Keeping an accurate and up-to-date record - Maintaining up-to-date records is also essential. When the record becomes outdated, it becomes challenging to identify pending invoices, making timely submission impossible.
• Automating your process - Consider setting up a system or using software that can automatically generate and send invoices based on predetermined criteria, such as the completion of a project or the delivery of goods and services. This can help ensure a timely process.
  

Use a Combination Invoice Number.

Remember to include the invoice number and avoid using sequential numbers, as they may result in duplication. Instead, use a combination of letters, numbers, and special characters that reflect the date, project name, code, etc.

Offer Various Payment Methods.

Offer various payment methods that are suitable for different countries and currencies, such as

• Bank Transfer or wire transfer - Refers to the direct transfer from one bank account to another. This is often a preferred method when transferring a large mouth of money thanks to its secure and reliable nature. However, it is not the fastest option.
• Online Payment - This is often done through online third-party providers like PayPal, Apple Pay, Google Pay, Venmo, etc. This method is preferred when you want a payment to be made quickly.
• Credit cards and debit cards - Another convenient and quick method for those who don't have access to a third-party payment provider. However, it may be subjected to high transaction fees.
  
  The three options above are mostly applicable to both domestic and international payment

💡Tip: Discover more in our article about invoice payment

Send a Reminder

Reminders before and after an invoice is due can save a lot of time and effort in the long run. You can send a reminder through email or set up an automatic reminder in the invoice management software that you're using.

If you're sending a reminder through an email, it's best practice to keep the tone friendly and professional; mention the invoice number in the subject line and all relevant information, including the amount due and the due date in the body of an email. You may also include a copy of an invoice for more convenience.

For the timing, consider sending a reminder one week before the due date, promptly after the overdue, one week after the overdue, and one month after the overdue.

Add Discounts, Fees, and Disclaimers.

To avoid the tedious process of chasing unpaid invoices, It's a good idea to add an early payment discount and late fee for overdue accounts. This automatically encourages customers to pay on time. 

It’s also a good practice to include a disclaimer that says you have the right to take legal action or withhold services if payment is not made by the due date.

💡 Tip: If your customer has paid, you may need to issue a receipt. Learn more about the receipt of payment and the differences between an invoice and a receipt in our article.

Set No More Than a One-Month Due Date.

Setting the right due date is no less important. While it is mainly dependent on your business term, a time frame of a few weeks to a month is typically ideal. Writing out the due date in full can also avoid confusion.

Keep a Digital Backup.

Keeping bills digitally can help protect information. Cloud-based services, like Dropbox or OneDrive, are great options as they offer encryption and backup features that can provide more security than local devices.

Here are the most popular services that you can use for your invoice digital backup.

• Dropbox - Store files, cloud content, paper docs, and web shortcuts in one place, with password protection, expiring links, and download permission features.
• OneDrive - File sharing, editing, collaborating, and PC sync service. Compatible with Microsoft suite of apps like Word, Excel, and PowerPoint.
• Google Cloud Storage - A private and secure data storage by Google that can store, backup, archive, and deliver media and content. It has built-in data security that can be configured according to specific requirements.
• Apple iCloud - Storage service available for Apple devices. It has features like a password management system (iCloud Keychain), synchronized multi-app editing and sharing, and backups.

Use a Tidy Invoice Layout.

Mismatched templates create an unprofessional impression and confuse your clients, especially when the total amount on the invoices keeps moving around. Similarly, untidy templates with jumbled information and unnoticed due dates are just as bad.

Both of those can cause payment delays.

So, It's important to ensure your invoice templates are consistent and organized. To achieve that, you can design your template, use online templates, opt for invoice management software with customizable templates, or use an invoice generator tool.