Cash in advance is a payment term where the buyer pays the seller in cash before receiving a shipment or before the shipment is made. Cash in advance may be expected if there is a delay between the initial sale and the delivery.
Why is cash in advance beneficial?
Cash in advance is used to eliminate credit risk or non-payments for sellers. This payment method benefits sellers, but increases risks for the buyer. Cash in advance payments aren’t uncommon, but the risks for buyers become greater if the seller or network in the transaction aren’t trustworthy. For this reason, cash in advance typically isn’t buyer’s first choice.
Are there any alternatives to cash in advance?
Cash in advance payments are commonly used in e-commerce, though aren’t standard in other industries. A few alternatives to cash in advance include:
Letters of credit: A letter issued by one bank to another (usually in another country) that guarantees payments made to an individual under certain conditions.
Equipment leasing: During an equipment lease, the leasing company will invest in the equipment for the business, allowing the business to use the equipment for a period of time.
Business lines of credit: A business line of credit allows businesses to access capital up to a predetermined credit limit.
Angel investors and venture capital: Investors or venture capitalists provide equity financing in exchange for ownership stakes in the company.
Grants and competitions: Some businesses might be eligible for grants or competitions that offer non-equity funding.
What are the drawbacks of cash in advance?
Cash in advance payments are not always ideal. For businesses, this payment type can cause several issues, such as:
- Disrupting cash flow
- High interest rates
- It sacrifices safety and consumer protection