Customers typically pay invoices after receiving goods or services. However, it is also possible to settle payment in advance. Advance payments involve customers paying an invoice in full before the business delivers goods or completes services. Offering advance payments is a financial strategy that can enhance a business’s cash flow and requires careful planning.

In this article, we explain advance payments, including their advantages, disadvantages, payment process, revenue recognition, and more.

What’s in this article?

• What are advance payments?
  
• What businesses use advance payments?
  
• Advantages of advance payments
  
• Disadvantages of advance payments
  
• How to offer advance payments
  
• How to account for advance payments
  
• How Stripe Revenue Recognition can help
  

What are advance payments?

Advance payments settle invoices in full before businesses ship goods or provide services. Payment arrives before the invoice’s scheduled due date.

Unlike deposits, advance payments cover the full amount due rather than a partial amount. This settlement method is low risk for the seller because it eliminates the possibility of nonpayment. Advance payment is also lawful, as long as it is defined in an agreement.

Businesses often suggest advance payments in exchange for cash discounts for their customers. With this strategy, customers are able to benefit from reduced pricing, and suppliers can receive revenue faster.

What businesses use advance payments?

Advance payments are often used in the construction industry for large-scale projects. With payments made in full before services are provided, businesses can cover purchases of raw materials and pay employees and subcontractors.

Businesses can also request advance payments for high-value or personalized orders. For example, a carpenter making a custom piece of furniture can ask for payment in advance to minimize the risk of nonpayment if the customer cancels the order or changes their mind. Made-to-order goods are difficult to resell due to their uniqueness.

Event organizers also often prefer advance payments because organizers make preparations months in advance. When organizers receive payment before the due date, they are able to reserve venues, engage multiple service providers, manage unforeseen circumstances, and solidify the customer’s commitment.

In addition, most companies using a subscription model require full payment at the beginning of the month or year to access their services.

Advantages of advance payments

Advance payments offer many advantages to businesses, allowing them to do the following:

• Stabilize business liquidity and avoid shortfalls
  
• Increase liquidity
  
• Finance business activities
  
• Reduce the need for working capital
  
• Better manage unforeseen events and inventory
  
• Eliminate the risk of nonpayments and late payments
  
• Reduce last-minute cancellations
  
• Simplify payment processes
  

Advance payment also offers customers greater negotiation advantages. They can obtain a significant commercial discount, reducing the cost of their purchases. Customers also avoid potential late penalties by paying before the due date.

Disadvantages of advance payments

Some customers might hesitate to pay in full before receiving the goods or services sold. Being required to pay in advance can dissuade some prospects, especially if the competition offers more favorable payment terms.

With advance payments, customers do not have many options if the seller fails to deliver goods, performs unsatisfactory work, or provides defective products—especially if the business does not honor the agreement or leaves a project unfinished. Therefore, advance payments can be a major risk for customers. They can suffer substantial financial losses if the goods or services are not satisfactory or are not delivered.

For sellers, not fulfilling an agreement can lead to legal action and a demand for reimbursement. It could even cause harm to the seller’s brand image.

How to offer advance payments

It’s important to draft a well-defined and transparent agreement that clearly addresses the general terms and conditions of sale and protects both parties. Businesses should include an option for advance payment among the available payment methods.

If a business offers a commercial discount to encourage payment in advance, this must be noted on the invoice. The business must also indicate the applicable discount rate and the terms required to benefit from the discount, in compliance with Article L441-9 of the French Commercial Code. If the business does not offer a discount, it must note this on the invoice with wording similar to: “We do not offer a discount for payment in advance” (“Nous n’accordons pas d’escompte en cas de paiement anticipé”).

Businesses should consider using a secure payment gateway (e.g., Stripe). When payments are made in full, businesses should consistently communicate with customers about project or order progress to avoid misunderstandings. The business’s goal as a supplier is to guarantee a smooth payment process and a worry-free partnership.

How to account for advance payments

A special bookkeeping entry is required when a customer settles an invoice before the business delivers goods or provides services. How it is recorded depends on the business’s accounting system.

For businesses that use cash accounting (e.g., small and medium-sized businesses and sole proprietorships), advance payments are recorded at the time of the transaction, when the amount is deposited into the business’s bank account. For businesses that use accrual accounting (e.g., large companies), advance payments are recorded when an invoice is issued, not at collection.

Come Stripe Revenue Recognition può essere d'aiuto

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Scopri di più su come Revenue Recognition può aiutarti a essere conforme ai principi contabili globali oppure inizia oggi stesso.