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For some businesses, it makes financial sense to demand upfront payment. This is particularly true in situations where bespoke work is required to exact specifications, as the upfront payment guarantees cash inflow, regardless of whether or not the job is seen through to its completion. This is a deposit and is commonly represented as a percentage of the final total amount due.
The benefits of a deposit
If a job is going to take a long time to complete and a lot of work is required or the job in question requires the use of materials that can’t be resold without a lot of effort, then a deposit is always a sound business decision.
The primary benefit offered by a deposit is the security it offers the business. But it also proves the client is invested in the job so while there is always the chance they will back out of the sale, it’s far less likely.
In some cases, the deposit can also cover the expenses of the job itself, including man-hours and materials. It also provides income before the final payment is made, which could prove vital if the business is only small and able to work on a few jobs at any one time.
Requesting a deposit
The first thing you need to decide is whether to request a refundable or non-refundable deposit. The former is generally only agreed upon in the event an item is being loaned to a client, as the deposit will only be refunded if they return the item in its original state. This is often the case when it comes to vehicle rental. Non-refundable deposits, meanwhile, are generally used for freelance projects and in big-ticket situations such as real estate.
There is no law stating whether or not to request an invoice, it’s up to the business. But if the job is particularly large or requires a lot of extra work, a deposit acts as a collateral safety net for the business and as partial payment for the client.
What is a deposit invoice?
A deposit invoice requests payment of a deposit from the client’s bank and includes the names and addresses of the business and the client, as well as a description of the services rendered and the total deposit amount. The full cost will be included on a final invoice once the job is completed. As with a traditional invoice, there will often also be information stating within how many days the invoice should be paid.
Sending a deposit invoice
If you plan on requesting an invoice from your clients and customers then you’ll need to issue a deposit invoice with clear terms and conditions stating whether or not the deposit is refundable.
Once the deposit has been paid, the business should start the job and when the job is complete it should then issue a second invoice for the final amount. The deposit will be included here as a negative amount subtracted from the total.
Note that, as your business scales, keeping track of your invoices and deposit invoices will get more complicated. In this case, we’d recommend investing in an integrated accountancy software solution such as Xero. This will automate payments invoices, not only simplifying the process but leaving accounting teams free to use their talents elsewhere.
Xero is one of 200+ partner integrations that GoCardless users can utilise to take and reconcile payments automatically, reducing the time and stress that comes with sending invoices.