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What is advance payment?

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Payment in advance (PIA) or advance payment is when an entity makes a payment ahead of normal schedule. Sometimes sellers or businesses require payment in advance to:

  • Provide insurance for non payment
  • Cover out-of-pocket costs for the product or service
  • Account for limited product capacity
  • Cover custom-made products for a particular customer

Payment in advance is typical if consumers have bad credit or when insurance companies extend coverage to the insured. Payment in advance protect sellers in case the buyer doesn’t pay on time.

What are some examples of payment in advance?

There are several types of payment in advance. A payment in advance could cover the entire project or period of work. Companies may also opt to pay a rolling payment in advance for ongoing services. Here are a few examples of payment in advance:

A salary advance is a loan companies give employees. The company will pay the employee a lump sum, which is then paid back over a few weeks or months. In general, salary advances come out of the employee’s wages.

A down payment is the first payment made when buying something on credit. The payment is a percentage of the item or service’s full ticket price. Many property purchases require a down payment.

When a business pays a contractor on retainer, they are paying them in advance for an agreed upon number of hours or services. Some independent contractors offer discounts if their clients pay retainer fees instead of accepting traditional invoices.

A few more examples include:

  1. Paying a quarterly or yearly subscription for a software or service
  2. Credit card prepayments
  3. Deposits to an independent contractor to develop a website

What are some pros and cons of advance payments?

A business can benefit from prepayments, but there are disadvantages as well:

Pros

  • Businesses won’t need to chase payments
  • Customer protection; if the business isn’t satisfied with the products or services, they can request a refund of payment in advance made
  • Companies can calculate what the project will earn and cost at the same time
  • It’s easier to maintain consistent cash flow
  • Automating invoices is easier

Cons

  • Some customers may find it unusual
  • It’s harder to reimburse clients
  • If a project’s scope changes, the company will need to apply changes to the next invoice

What is the difference between payment in advance and down payment?

Advance payment is a general term for payments that are received before the work or products are delivered. A down payment is a type of advance payment. Down payments are also called partial payments in advance.

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