Is an Invoice a Contract?

There is no legal significance to an invoice on its own. The market share for online invoices is 20.4% , with 80% growth expected by 2027. Despite the importance of invoices to businesses, invoices are not legally binding agreements between the business and its clients.

The tampering of an invoice makes it unsuitable for use as a legal document, and the invoice lacks proof that both parties involved agreed to the terms. Small businesses must create professional contracts that can serve as legally binding contracts, unlike invoices, to ensure clients pay on time.

To clarify all the concerns that you may have regarding the what is invoice and contract, we have put together the complete guide.

Table of Content

1. What is an Invoice? (Pros & Cons)
2. What is a Contract? (Pros & Cons)
3. Invoice vs. Contract
4. How to Create a Contract?
5. FAQs
6. Conclusion

What is an Invoice? (Pros & Cons)

Invoices are documents that service providers send to clients to collect a payment, and purchased goods or services are included in this document itself. Invoices can also create legal records if they contain the names of the seller and client, product descriptions, and prices. If you fixed the roof, did the makeup, or launched a consulting business, you may need to send an invoice.

You can employ invoicing software like InvoiceOwl to draft a professional-looking invoice that gets you paid faster .

• Payment terms can be set up, so you receive payment for your efforts. Trading relationships should clearly define these terms, but your invoice formally demands payment. Invoices have several advantages:

• Quick payments . Likely, a customer will not pay you without receiving an invoice to request payment for services provided. Debt is rarely settled voluntarily or without a prompt after an invoice has been issued for goods or services.
• Clients are reminded of their liabilities through invoices . A detailed bill lets customers see what they are paying for.
• It’s helpful for keeping records . Self-employed individuals must keep sales, income, and expense records for five years, and businesses must retain records for up to six years. It is possible to risk a hefty fine from the revenue if you do not maintain accurate and up-to-date records of invoices issued and received.
• It’s an opportunity to present your brand and company positively . Adding a logo, website address, and professional language to the document or invoicing process helps make it look professional. The ability to generate invoices and collect payments efficiently can improve customer satisfaction. Poorly managed systems can also damage a company’s reputation.

• Incorrectly drafted, vaguely worded documents can lead to disputes or delay payments.
• It is possible to challenge an invoice if it appears approximate and the product sales or work hours are not meticulously recorded. Invoices should be clear, detailed, and precise.
• If invoices are issued late, customers may be relaxed about settling their debts. To get the client’s attention, demands should be raised immediately.

If you are concerned about the invoicing process, no worries; you can move to InvoiceOwl , and you won’t face problems generating an invoice.

Ready to Explore InvoiceOwl Exclusive Features For Your Business?

Now, win more jobs and get paid faster with InvoiceOwl invoicing software that makes estimating and invoicing easier!

What is a Contract? (Pros & Cons)

Contracts are essential to business. A legal contract is a legally binding document between the parties. Typically, a legally binding contract clearly explains all parties’ expectations, laying out the agreement’s details. A contract may include information about payments, materials, timelines, and how disagreements between the parties involved can be resolved.

• Verifies what you and the other party agreed to.
• Makes the agreement clear from the beginning, preventing future misunderstandings or disputes.
• The terms of the agreement are documented, and the terms do not change, so you have security and peace of mind.
• Decrease the likelihood of disputes regarding responsibilities, timeframes, payment, and invoice terms associated with services to be provided.
• Provides a framework for resolving disputes.

• Limited flexibility : There are restrictions on your flexibility, and this impact may affect future decisions. Parties who sign legally binding contracts have certain responsibilities. Alternatively, a company may change a worker’s role at any time.
• Time-consuming : It takes more time to write up a legal document than to agree verbally. Delays and confusion can result, and both parties may not understand the legal terms.

Writing a legal document can be time-consuming, but it can make compliance easier.

Invoice vs. Contract

Contracts are legal documents between two parties in which one party specifies the terms of the legally binding agreement, and the other accepts those terms. An invoice involves a document between parties. Apart from involving two parties in an agreement, an invoice is a written document to request payment for services provided to another party by one party.

On the other side, a contract is usually a handwritten contract that both parties sign, although it can also be verbally signed. When both parties explicitly agree to a legal document in electronic communication, such as an email or text message, they make a contract.

Both parties agreeing to the legally binding contract are protected since they are legally binding agreements.

The legal validity of a legal document is based on two main criteria:

• In a contract, one party must extend an offer that the other party accepts, and
• Value exchange is needed, such as a freelancer exchanging graphic design skills for cash payment.

How to Create a Contract?

To protect your legal rights, contracts are a great choice. Businesses and significant asset purchases require them. In most cases, verbal agreements aren’t enforceable, so it is best to write them down.

Here are the step-by-step instructions for creating a contract:

Step 1. Information gathering

List the parties’ names and affiliations and the contract’s effective date at the top of the page. For example, “XYZ Company agrees to the terms and conditions contained herein on this 1st of January 2022.”

Step 2. List your offers/services

Next, you will need to describe or list the products or services you are offering and expect to receive payment in exchange for them. In this section, you should get very specific with the terms you are using since general terms may be interpreted differently.

As a business owner, you would rather not be on the receiving end of an agreement where the client can pressure you to work harder than you want to.

Step 3. Determine term length

The next step involved is specifying the duration of your contract. Depending on the company, they may end after a certain period, like 90 days, or specify a specific date for termination. It is also possible to indicate in this section that your customer is willing to work with you continuously.

Step 4. Lay out the consequences

The business world is full of claims of breach of contract and negligence, and customers should understand the penalties for not paying or not receiving orders. To avoid dealing with non-compliant individuals in the future, include the term “null and avoid” in this section.

Step 5. Defining the terms of the dispute resolution

How does your company handle disputes? This question has a lot of options. One option would be to allow traditional civil litigation methods. Mediation or arbitration option, however, could be enforced as an alternative dispute resolution method.

Step 6. Create signature and date lines

Unless both parties sign the contract in their respective place, you cannot have a valid and enforceable contract. Both parties should sign signed contracts on a timeline with two signatures. If you sign the contract first, or if the order of signing implies any advantages, it does not matter who signs the contract first.

Can an invoice be considered a contract?

Can a contract be considered legally binding?

Can I invoice without a contract?

Conclusion

Now you know what sets both invoices and contract different from each other. No matter their differences, both serve equally essential roles in any business. One does the work of protecting rights, and the other does the work of getting payments from the clients.

Jeel Patel is the founder of InvoiceOwl, a top-rated estimating and invoicing software that simplifies the invoicing and estimating processes for contractor businesses. Jeel holds a degree in Business Administration and Management from the University of Toronto, which has provided him with a strong foundation in business principles and practices. With understanding of the challenges faced by contractors, he conducted extensive research and developed a tool to streamline the invoicing and estimating processes for contractors. Read More

Get weekly updates from InvoiceOwl.