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Healthy cash flow is imperative to running a business, and late payments invariably cause cash flow problems. When money doesn’t consistently come in on time, it can be difficult to make capital investments, pay bills on time and stay on good terms with suppliers.
One way to help ensure you receive payments on time, or even early, is through utilising advanced payments. This is particularly useful when dealing with clients with a poor credit history or a reputation for failing to pay punctually.
In this post, we’ll go through advanced payments, what they entail, and how they can ultimately help you to get paid sooner.
What is an advance payment?
Advance payment is exactly what it sounds like: a payment made ahead of schedule. Paying for goods before you have received them, for instance, is an example of an advanced payment, as is paying for a service before it’s carried out.
Advanced payments are sometimes mandated by sellers as a means to protect against potential nonpayment, or to fund the costs for the business to carry out the service. This may involve the purchasing of supplies, for instance. For some companies, this is standard practice, while others only require advance payment in special cases.
Examples of advance payments
We come across advance payments in our day-to-day lives as well as through business pursuits. Some examples of everyday advanced payments include:
Paying for subscription services, such as a streaming network or club membership, for a whole year instead of monthly.
Paying monthly premiums to your insurance company in advance of needing their protection.
Paying a solicitor a retainer fee.
Paying for a ticket before seeing a film or show.
Paying for your coffee before it’s made and served to you.
When is advanced payment required?
There are many instances where advance payments are requisite. These include the following:
In the case that a customer has a poor credit history and extending them credit would be a big risk.
When the availability of a product is limited or reserved.
When a product is bespoke and therefore cannot be sold to any other customer.
Insurance companies usually require payment in advance of extending coverage.
Advanced payments vs deferred payments
As already discussed, advance payments are paid in advance of the receipt of goods or services. In contrast, deferred payments are made after the delivery of a good or the carrying out of a service.
Advance payment guarantee
Advance payment guarantee functions as a kind of insurance. It makes sure that the buyer, in the case that the seller fails to deliver the goods or services, will receive a refund of their advance payment. This protects the customer, allowing them to consider a contract as void should the seller not hold up their side of the deal.
How advanced payments can help with cash flow
Advanced payments can help you get paid sooner and improve cash flow in a number of ways. Firstly, there is the obvious consideration that receiving payments in advance ensures that you will indeed receive the payment in full and on time — indeed, early. However, there are several less obvious ways that advanced payments improve cash flow.
As a supplier, advanced payments are important when an order comes through which is particularly burdensome. Given the amount of resources involved, these suppliers need some assurance that the buyer will not back out of the deal, which advanced payment provides. It can also help to cover the cost of the required resources for the supplier.
Additionally, if a company does not have enough capital to purchase the materials required to complete a large order, part of the advanced payment can be put towards buying the necessaries.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.