What is an invoice and how to write one for your small business

It all starts with an invoice.

So what is an invoice? An invoice is perhaps one of the most important documents you produce for your business. Think of it as a commercial document given to a customer by a merchant (in this case, you) that states the total amount due for goods or services rendered. That’s a fancy way of saying it's the bill a business sends a client to get paid.

No matter what kind of business you lead, an invoice lists the products or services provided by the seller, as well as payment terms and other information relevant to the customer. For many businesses, the invoice also serves as the buyer's receipt. And without it, you run the risk of missing or forgetting a payment.

Ready to learn the ins and outs of what is invoicing? In this guide, uncover the basics of invoices and why they’re critical to success.

What is an invoice used for?

Maybe you have not had to use an invoice before and still managed to receive payment successfully. However, as your business grows, that may not be the case. Besides helping you get paid, an invoice represents who you are as a company. It tells a story about your business — where you are, what services you provide, and what your company looks like. It says to the world that you are proud of what you do all the way through to the final receipt you deliver.

Here are some quick benefits of using an invoice:

• Helps get paid on time. By using an invoice, you give your business the best possible chance of getting paid on time. Reason being is invoices generally include payment terms and conditions, so you and your client are aligned on payment expectations.
• Monitors cash flow, payment tracking, and business analytics. By sending invoices, you can easily keep track of what has been paid, what is still outstanding, and what requires a follow-up. Plus, invoices can also help better forecast cash flow by giving you a look at what’s been paid and what’s coming up ahead, especially when it comes to recurring payments.
• Important for tax filing and record-keeping purposes. When filing taxes or maintaining updated business records, it’s imperative you track the income you received during the year — and sending invoices can make the process easier.

Different types of invoices

There are many types of invoices you can use to get paid, including:

• Commercial invoice: Also known as a standard or final invoice, this is the most common invoice for businesses to bill for their product or service and get paid on time.
• Timesheet invoice: A timesheet invoice demonstrates the hours a business or its employees spent on a particular project in order to charge the customer.
• Credit invoice: This invoice is issued when a business needs to refund or offer a discount.
• Recurring invoice: Recurring invoices are best for businesses that bill the same amount on a consistent schedule, such as weekly, monthly, or annually.
• Retainer invoice: Retainer invoices help businesses collect advance payment for a service. The funds collected on a retainer invoice are not considered income but rather a liability. Once the services are rendered, the payment is considered income. However, if they are not completed, the funds may be returned to the customer.
• Debit invoice: Debit invoices occur when a business needs to increase the amount a customer owes them.
• Pro forma invoice: This type of invoice serves as an alert for how much a project or service will cost.
• Interim invoice: Also known as a payment plan, an interim invoice is an alternative to sending one large invoice to your customer. Instead, interim invoices break down the cost into smaller payments as the project progresses.
• Past due invoice: This is an invoice reminder or message indicating the original invoice was not paid on time and is now considered late.

How to write an invoice

When creating an invoice, get started with these steps:

1. Include contact details, invoice number, and date: Start by filling out the top of your invoice with your business name and contact details (address, phone number, email). Add the client's contact information, including their name, address, and contact details. Then assign a unique invoice number for tracking purposes, and specify the date the invoice is issued.
2. Write an itemized list of all billed goods/services: Create a list of the products or services provided to the client. Include a description of each item, quantity, unit price, and total price for each line item. Calculate the subtotal for all items. If applicable, specify any taxes (e.g., sales tax, VAT) and their respective amounts.
3. Calculate the amount due and add in any payment terms: Calculate the total amount due by adding the subtotal, taxes, and any additional charges. Clearly state the payment terms, such as the due date and any late fees or discounts for early payments.
4. Include payment instructions: Provide clear instructions on how the client can make the payment, including accepted payment methods (e.g., bank transfer, credit card). Include your bank account details if needed.
5. Invoice footer: Add a thank-you note or a message expressing appreciation for the business.

E-invoicing vs PDF invoicing

Just like there are many different types of invoices, there are also various invoice formats you can use. No format is better than the other — it all comes down to what makes the most sense for your business.

Two common formats include e-invoicing and PDF invoicing:

• Electronic invoicing: Instead of manual or paper invoicing, which can be tedious and tough to manage, electronic invoicing digitizes the invoicing process. Learn more about the benefits of electronic e-invoicing, plus learn more about PayPal invoices in our Help Center.
• PDF invoicing: Whether you create an invoice with a Word invoice template, on an Excel sheet, or with an invoice generator, you can choose to save the document as a PDF and send it manually to your client directly. The result? Your invoices can be easily shared and printed, ensuring that the layout and content remain consistent across various devices and platforms.

What to include on an invoice

It can be difficult to keep track of all that should be included on an invoice. If you’re not sure where to start, use this checklist of some of the most important details every type of invoice should mention:

• Invoice number
• Service date
• Date of sending the invoice
• Name and contact details of the seller
• Name and contact details of the customer or client
• List of items and a short description
• Cost per unit of product/service
• Tax rates
• Total amount owed with currency
• Payment terms and conditions

Tip: Using an invoice template makes it easy for you to make sure you have included all the necessary elements to the invoice.

When to issue invoices?

Invoicing typically takes place after the item or service has been delivered. For instance, if you’re a marketing company hired to create an event flyer, you may send your invoice once the flyer is completed. On the other hand, if you’re a catering company providing food for a luncheon, you may either send your invoice after the luncheon is complete, or you may charge 50% upfront via an interim invoice with the final balance due upon completion of the event.

For large-scale projects and jobs that may take days, weeks, or more and/or require specific materials, businesses often consider a partial payment before the work begins, with the remaining balance due at completion. For more on how to send an invoice, read this.

As for invoice payment terms, this is a personal decision that depends on factors like the industry you’re in and/or whether or not you’re short on cash. Net 30 is generally one of the most common terms, but that doesn’t mean you can’t establish something different for your business, especially if you find yourself looking for tips to address a cash flow crunch. Learn more about invoice payment terms.

Most importantly, give customers an easy way to pay, which, in turn, may help you get paid faster. For instance, PayPal Invoicing can get businesses paid fast. In a recent study, 79% of PayPal invoices are paid within one day of sending the invoice¹. That’s much faster than traditional offline invoicing.

View our 2-minute “How to send invoices online” video and see how easy it is for you to customize and send invoices, and how easy it is for customers to pay.

Importance of invoices

Beyond serving as a convenient way to help businesses get paid, many people opt to issue invoices to consumers to keep a thorough record of all their income and sales. Both self-employed workers and companies can use their invoices for record-keeping purposes.

Help your business get paid on time with PayPal Invoicing.