Can an invoice/bill serve as a contract?

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If you run a business and enjoy getting paid, an invoice/bill is one thing your business needs to improve. An invoice/bill and a contract are important documents every business needs. With an invoice, you give a detailed payment request to your customers. Many times, it is confused for a contract. 

However, they are entirely different from each other. While a contract can stand alone, an invoice cannot. You will need to accompany an invoice with a contract. 

With the addition of specific details, you can make an invoice/bill to make it a legal document. For example, a signature of both parties on an invoice/bill shows that both parties have agreed to the invoice/bill. While this does not still make it a contract, it establishes an agreement.

What is a contract?

A contract is a legal document that shows an agreement between two parties. It is used as proof to show that both parties concerned reached a consensus which none is to fault.

Usually, a contract helps manage both parties’ expectations and drives a commitment to what is detailed in the contract.  

A contract is a legal document and can be enforced by law. Consequently, when the terms on a contract have defaulted, the affected party is entitled to legal redress.

Contracts are essential in upholding business relationships as they help to ensure that transactions can be closed on agreed terms. This it does while outlining the legal obligations and rights of both parties.

They also protect the parties involved. This is because a contract guarantees that no one can go against the agreement without a consequence that compensates the cheated one.

Interestingly, a contract doesn’t have to be written. Although written contracts are common and preferred, oral contracts also exist. However, before they can be legally enforced,  oral contracts must have proof, be in line with the law, and meet other requirements of a contract, 

Despite this, the binding rule is that once a person signs a contract, they become bound by law to fulfill all the terms in the signed document. Whether or not they have read the terms in the contract. 

With contracts, even private discussions become legally enforceable.

If you run a business with either an invoice or a bill, a contract ensures protection for your business in the case of default. Once the terms in the contract have been violated, you can take legal action to ensure you get paid. 

Based on these, you are also enabled to prevent conflicts and disputes and even mitigate risks.

Usually, a contract for payment will contain the exact amount of money to be paid, details on auto-renewal, terms and dates of auto-renewal, information on the frequency of payments, how clients should make payments, and the consequences of late payment.

A contract should have four elements: an offer, consideration, acceptance, and mutuality.

What makes an invoice legal

Even if the thought is not common amongst many individuals, an invoice can serve as a legal document. With specific details, you can take your invoice from a regular to a standard legal document.

A regular invoice contains the Invoice number, your business’s contact information, the client’s contact information, an itemized list of any goods and services provided, the date, the business contact information & a description of goods and services rendered, the amount charged, the amount owed and possibly a VAT amount.

The problem is none of this information can stand as a legally binding agreement. An invoice is a proof that one party tried to bill the other. It lacks proof that the party accepted the billing information.

This is the primary reason an invoice on its own cannot stand as a legal document. To make your invoice/bill legal, here are a few things to do:

1. Become registered for VAT

The issuing business must be registered for VAT to make an invoice legal. In countries like the UK, invoices from companies registered for VAT are legally binding.

A VAT registered company uses a VAT invoice. A VAT invoice usually contains a VAT registration number, The tax point, the total VAT rate of items with similar VAT rates, and a list of items with different VAT rates.

2. Signatures

Another essential thing to make your invoice legal is to enforce the use of signatures. Signatures indicate that both parties agree with what the invoice contains. While this does not make your invoice/bill serve as a contract, it makes it become a legally binding document. 

With a signature, you can prove that someone has not only agreed but also read and understood the details in the invoice. This way, you may be able to enforce payment legally if the customer defaults on a charge.

Signatures also help prove that you have kept up your end of the agreement. A business owner can sign an invoice to show that the product or service requested by the customer has been delivered. 

This clears any doubt that payment has defaulted because the product or service was not delivered, mitigating risks and protecting the business.

3. Add other supporting documents

An invoice, by itself, doesn’t have sufficient information to be legal. If you can’t add the necessary information to the invoice, the best bet may be to add other supporting documents.

The supporting documents are to ensure that it can be proven that the transaction detailed in the invoice happened. 

An essential supporting document you can add is a contract. A contract confirms that the transaction took place and both parties agreed. Important information your contract should include is the amount due, the expected date and method of payment, the product and service rendered,& the delivery date.

An email may be an essential supporting document to try if you use digital invoices. Since not all clients may agree to sign an invoice digitally, you may send an email with the invoice asking that the client acknowledges the invoice.

The customer acknowledges that they agree to the invoice details in acknowledging the email and its content.

4. Include Invoice Terms

By including terms on your invoice, you not only make them legal, but you also better manage the expectations of yourself and your customers. They not only give clarity into your billing process but also show customers that there may be consequences based on the information in the terms.

What are invoice agreement terms?

Invoice agreement terms give information on all the terms that bind you and your customer as regards payment. With the terms, you details what payment options are available and what your customer can benefit.

While they play a role in reducing disputes on payments, they may also help you get paid faster.

Your invoice agreement terms should not be general; they must be tailor-made and designed according to your business needs and peculiarities. Your invoice terms should be based on your current cash flow, what works best in your industry, and your client’s history.

Here are a few suggestions on basic things you should include in your payment terms:

1. Early payment rewards

Customers’ considerations must be in mind when you add this term. As much as possible, your payment terms should reward early payment by possibly giving a certain percentage of the total amount due. You may also consider offering flexible payment methods to allow clients to pay quickly.

Additionally, you should set payment deadlines and enforce them.

2. Late Fees and Interest

Late fees help compensate for payments that take a long time to complete. If you have customers who constantly delay payments, you may want to consider adding late fees or interest charges to your invoice terms.  

3. Payment in advance

Your invoice should make accommodations for payments made in advance. Terms guide how much you require before the job starts and how the customer will make the rest of the payment. 

4. Due upon receipt: 

Businesses usually connote that the price is due by the next business day. Adding this to your terms mandates that customers cannot delay payments. At the same time, it seems impossible for payment to be sent immediately after receiving the receipt. 

5. Line of credit pay: 

With a line of credit pay term, you allow your customers to space their payments. Your customers can pay weekly, monthly, fortnightly or even yearly.

This system is usually more suitable for long-term clients and is more effective when it has a contract to avoid disputes. 

6. Early Payment Discounts

Payment discounts are excellent rewards for customers who pay within a specific time frame. Some businesses include early payment discounts to speed up getting payments. While this isn’t guaranteed to get you the money quicker, it is worth using. 

7. Prepayment

If you run a business that is constantly at risk of cancellation, especially after booking, you may need to add this term to your invoice. Prepayment requires that once booked; the customer will need to make full payment. With the addition of specific clauses, you may alter the entire payment term to smaller percentages.