Deposit Invoice: When & Why You Should Use it + Template

A deposit invoice is used to request a partial payment for services and goods that will be delivered later. The advance payment is meant to cover part of the costs of preparing the item or providing the services.

There are several advantages that you can gain from creating a deposit invoice, and that’s what we’ll discuss and explain in this article.

We will also guide you on how to create a deposit invoice, write a deposit invoice email template, and more.

Let’s begin!

Key Takeaways

• A deposit invoice is issued when a business owner or seller requires upfront or advance payments to prepare the goods or services a customer purchases.
• A regular invoice requires the entire payment for the customer’s purchase, while a deposit invoice only requires a partial payment for the services or goods.
• Creating an invoice with a deposit is suitable when selling wholesale goods, freelancing, securing cash flow, or protecting the business against fraud or nonpayment.

What is a Deposit Invoice?

A deposit invoice, an advance payment invoice, or an upfront payment invoice is a transactional document business owners, sellers, or vendors use to request a prepayment from their customers in exchange for purchased services or goods.

Upfront invoice payments are often used to cover the initial costs and prepare the client’s orders, a common practice for shops specializing in custom-made or made-to-order goods.

Other instances wherein requiring advance payments is considered a standard procedure include selling pre-order products, processing bulk orders, and establishing trust with new clients for freelancing projects.

Invoice vs. Deposit Invoice

The main difference between an invoice vs. a deposit invoice is that a regular invoice requests full payment for purchased items or services, while a deposit invoice requests advance and partial payment.

Deposit Invoice vs. Proforma Invoice

The key distinction here is that, unlike a deposit invoice, a proforma invoice cannot be used to request payment from a customer. Instead, proforma invoices provide a proposal or estimate to a potential buyer before the final invoice and the goods are provided.

In some instances, a proforma invoice may also be used to secure advance payments, particularly for international orders or purchases.

Technically, the proforma invoice, in this case, is still not legally binding and may not be used to finalize transactions. However, it may still be used as a reference when drafting the payment arrangements.

When Should You Use a Deposit Invoice?

The main reasons why you should use a deposit invoice are to establish protection for your business, secure cash flow, and regulate operational costs.

Securing partial or advance payment from customers limits the risk of having to follow up on outstanding payments or receiving no payment at all.

There are other specific instances or types of purchases in which you should consider generating a deposit invoice, including:

• Bulk orders. When preparing large or bulk orders, it is crucial to secure payment to avoid a significant loss in profit in case a customer decides not to proceed with their purchase.

• High investment costs. Some orders or products require the acquisition of rare or expensive materials or covering labor costs. Securing advance payment lets you purchase the necessary supplies and compensate your workers.

• Limited resources. Small businesses and startups often take limited orders due to lacking resources and manpower. As such, a deposit invoice secures cash flow and ensures sellers can acquire the necessary resources for a client order or project.

• Freelancing projects. Fulfilling freelancer or independent contractor jobs often comes with the risk of receiving late payments or not receiving the agreed-upon payment from the client.

Now that you know when it is best to issue a deposit invoice, you’re ready to learn the essential steps in creating a deposit invoice, which we’ll explain in the following section.

How to Create a Deposit Invoice

Creating a deposit invoice entails having all the necessary information about the order or purchase. In doing so, you can calculate the deposit more precisely and ensure you issue the deposit invoice to the correct customer.

Once you’ve secured all the details you need, you can proceed with the rest of the steps in generating an invoice with a deposit:

#1. Calculate the Costs

Some sellers charge a fixed percentage for their deposit. In contrast, others may require varying upfront payment amounts depending on the quantity of items requested or the type of service needed for a project.

Balancing your operational costs with the prepayment you’ll be requesting is essential to avoid underestimating your expenses or overcharging your customers.

#2. Create an Invoice Draft

An invoice draft or an initial invoice contains all the essential information in a regular invoice except the full amount of your customer’s purchase. Instead, it only reflects the deposit amount needed to prepare the goods or get started with the services that your client needs.

Whether dealing with multiple customers or one purchase order at a time, using cost-effective tools such as Paystub.org’s invoice generator lets you be more efficient when generating an invoice for every client order.

Our generator uses a selection of templates that you can choose from, complete with all the necessary fields in an invoice. It takes a few minutes to fill out our invoice templates, and you can also preview the document to verify that all information is correct.

#3. Send the Client’s Copy of the Deposit Invoice

Once you’ve verified all information on your invoice draft, you can finalize and print a physical copy of the deposit invoice or download a PDF copy of the document.

Next, send your client’s copy of the deposit invoice to their residential, business, or email address. Always double-check that you send the invoice to the correct recipient.

#4. Deduct the Deposit From the Final Invoice

Once you receive the deposit or prepayment from your client, deduct the initial amount from the total balance of the goods or services.

Your final invoice should also reflect the advance payment completed by your client and provide an updated net total or the balance your client must fulfill.

Ensuring your deposit and final invoices contain consistent information shows transparency and establishes customer trust.

What Information Goes on a Deposit Invoice

The information on a deposit invoice is mostly the same as the details you would find in a typical invoice.

However, additional information is also needed to help customers understand the amount they must pay and their remaining balance once they pay the deposit.

To help you understand better, below is a quick explanation of each of the key elements you must include when creating an invoice for a deposit:

• Seller’s name, contact, and address. Whether you’re a sole proprietor using your legal name for your name or have a registered business name, your name as the seller must be clearly indicated in your invoice. You must also see that your contact information and business address are up-to-date.

• Buyer’s name, contact, and address. Your customer’s personal details on your invoice should be updated and correct. Ideally, you must verify their information first before sending the invoice.

• Invoice date. The invoice date is the date when you issued the deposit invoice. It also serves as your basis when setting a timeline for sending your final invoice and establishing a payment deadline for your customers.

• Invoice payment terms. Your invoice payment terms include the conditions for completing the transaction with your client. It also details your preferred payment methods, accepted currencies, and discounts or trade credits you may offer, such as the 2/10 net 30 credit.

• Brief description of the purchased items or services. It is an enumeration of all the goods or services your customer requests. A brief description of your client’s purchase should specify the type of item or nature of service requested and the quantity of the goods.

• Total deposit. As the name implies, the total deposit is the advance amount or payment you request from your customer so you can get started working on their purchase or request.

• Invoice due date. The invoice due date is the payment deadline for your required deposit. Customers must send the advance payment on or before the due date on the deposit invoice.

Deposit Invoice Example

Here is a typical deposit invoice template or sample that you can use for your future transactions:

Benefits of Sending Deposit Invoices

The benefits of sending deposit invoices will depend on the nature of your business or the type of goods and services you offer. For instance, if you’re a vendor or supplier of raw materials or wholesale products, a deposit invoice protects you from significant loss in profit.

There are more notable advantages to issuing an invoice with a deposit, such as:

#1. Improves Cash Flow

Getting paid on time is crucial for small business owners to ensure they don’t fall short on their finances. As such, finding ways to secure payment from customers keeps business owners from falling short of their budget in case a customer fails to meet their payment deadline.

By sending a deposit invoice, business owners can guarantee they have continuous funding to maintain their operations.

#2. Reduces Financial Risk

Maintaining a business can also be risky because of the possibility of late payments or customers who cancel their orders at the last minute.

Without preparing a deposit invoice or establishing a late fee invoice policy to prevent unfulfilled payments, business owners may end up experiencing a dent in their profit and expenses.

#3. Increases Client Commitment

Requesting initial customer payment enables vendors to gauge a client’s commitment to their purchase.

Given the convenience of online payments and shopping apps, people can be tempted to send multiple orders to a seller without the real intention of fulfilling their purchases.

While not all individuals who cancel their purchases are considered scammers, there are still a handful of bogus or fake buyers who intentionally waste a seller’s time and energy.

That said, sellers require prepayment before processing or finalizing client orders to limit order cancellations and guarantee that a customer fulfills their payment obligations.

#4. Balance Operational Costs

A seller who creates custom goods or requires intensive labor to produce or fulfill their goods and services may issue a deposit invoice to balance operational costs.

Instead of waiting for their customers to send the total payment to generate profit, business owners request an initial deposit to avoid potential losses as they accommodate more customers.

#5. Manage Client Orders or Requests

Some business owners also require prepayments so that customers can reserve the items they want to purchase. It is a common practice for vendors who sell high-demand products, expensive items, or goods shipped internationally.

A deposit invoice also helps regulate the number of client orders for limited-stock items by helping sellers confirm a customer or buyer’s intent to proceed with their order.

How to Send a Deposit Invoice

To send a deposit invoice, you must first establish clear payment terms explaining the conditions of the deposit or prepayment. Your payment terms must also clarify whether the deposit is refundable or not.

Next, specify how much deposit you require and your purpose or objective for requesting an upfront payment.

After your client pays the deposit, you must also provide a separate invoice that details the remaining balance and shows the initial deposit as a negative value deducted from the final amount to be paid by your client.

Ideally, an email template designed specifically for requesting a deposit on an invoice effectively conveys the terms of your deposit invoice. That said, we’ve prepared a sample template for you to use as your reference:

Deposit Invoice Email Template

4 Best Practices for Deposit Invoices

The best practices for creating and sending deposit invoices revolve around practicing transparency. Most customers are willing to make the required advance payments, provided that the seller keeps them well-informed of the terms and conditions of their purchase.

#1. Send the Invoice Promptly

Sending the deposit invoice promptly avoids payment delays and ensures you follow your agreed timeline for preparing the goods or completing the project.

It is also crucial to notify your customer of their obligations regarding the transaction and, if possible, allow them to raise any questions they may have about the deposit.

#2. Clarify the Refund Policy

It is not enough to simply issue a deposit invoice to your customers and call it a day. As a seller or business owner, you must clarify or explain your policies and terms to your clients, especially if they are new customers.

You can also offer to negotiate your deposit amount, mainly if the client is a repeat customer, to encourage loyalty and strengthen relationships with your clientele.

#3. Update your Accounting Books

Once your client sends the payment, ensure the transaction is reflected in your accounting books. Otherwise, you might send the deposit invoice twice or cause an invoice dispute.

Keeping your accounting records up-to-date also helps you gauge your finances more accurately.

#4. Create an Email Template or Use Online Tools

If you are catering to multiple client orders, creating an email template makes negotiating your deposit invoice policies easier.

At the same time, when you pair your template with practical tools such as our invoice generator or online document editing tools, you can accommodate more customers without exhausting your time and resources.

Final Thoughts

Creating a deposit invoice effectively protects your business from possible fraud and secures cash flow for your operations.

Regardless of your reason for creating a deposit invoice, knowing when it is best to issue one and understanding the responsibilities of preparing the document ensure your business does not violate federal, state, or local invoice requirements.

More importantly, you must ensure that you adhere to your client’s consumer rights by informing them of your conditions and payment terms.

Deposit Invoice FAQ

#1. Is a deposit invoice a VAT invoice?

No, a deposit invoice is not a VAT (Value-Added Tax) invoice. A VAT invoice is an accounting document that itemizes and describes all goods and services subject to VAT or sales tax.

On the other hand, a deposit invoice VAT is usually accounted for upon receipt of the deposit.

#2. Is a deposit invoice mandatory?

No, a deposit invoice is not mandatory unless you want to protect your business, secure cash flow in your trade, specialize in tailor-made or wholesale items or need to balance your operational expenses with your profit.

#3. What is a progress invoice?

A progress invoice is a sales document used when business owners or sellers allow customers to pay for services in increments. Typically, the vendor, freelancer, or business owner charges their customer at each stage or progress of a long-term service or project.