Is an Invoice a Contract? Complete Guide to Legal Documentation

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.

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.

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

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.

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

Understanding Invoices vs. Contracts: Key Differences

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.

What Makes an Invoice Legal? Essential Components

For an invoice to be legally binding, particularly in the United States, it must include specific components that transform it from a simple billing document into a valid contract.

Add some necessary components as stated below:

• Business information
• Contact information
• Customer information
• An itemized list of all goods and services to be offered
• Total price to be charged
• Any taxes and additional charges
• Unique invoice number
• Invoice date
• Invoice due date
• Preferred payment method
• Payment terms comprising discounts
• Terms and conditions

Creating Legally Binding Contracts: Step-by-Step Guide

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.

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.