Advance Payment - Overview, Uses in Business, Risks

Advance payment is a payment made for a good or service before it is delivered. It can be required from the buyer to ensure a down payment on said good or. AdvancePaymentApaymentmadeforagoodorservicebeforeitisdeliveredHome›Resources›Knowledge›Finance›AdvancePaymentWhatisAdvancePayment?AdvancepaymentisapaymentmadeforagoodorserviceProductsandServicesAproductisatangibleitemthatisputonthemarketforacquisition,attention,orconsumptionwhileaserviceisanintangibleitem,whicharisesfrombeforeitisdelivered.Itcanberequiredfromthebuyertoensureadownpaymentonsaidgoodorserviceortopayforthecostofproduction.  Thebalanceofthepaymentcanberequiredininstallmentsasacontinuedpartofanadvancedpaymentstructureordeliveredattheendupondeliveryofthegoodorservice.Thecapitalprovidedasapartofanadvancedpaymentcanbeacriticalpartofthefundingstructureofabusiness,especiallyinacquiringexpensivemachineryorlogisticsLogisticsLogistics,orlogisticalplanning,referstotheprocessthatabusinessusesinordertocoordinateitssupplychainoperations.Itincludesawidevariety. AdvancedPaymentsinBigBusinessesCompaniesthatmanufacturelarge,expensivepiecesofmachinery–suchasfighterplanesorcommercialairliners–oftenrequireadvancepaymentsaspartofthepaymentstructurefordelivery.Therearemanyreasonsthatitisintheirbestinteresttodoso.Thefirstprimarilybeingthatitshowsacommitmentfromthebuyerthattheyareinvestedinthedeliveryoftheproduct.Itisasignificantgesture,especiallyifthepaymentisnon-refundableandsubstantial.Thesecondreasonisthatitprovidescapitaltofundcostlyprojects.Intheaircraftexampleabove,itcanprovidethenecessarycapitalneededtoconstructsomethingthatmayendupcostinghundredsofmillionsofdollars.Itwillhelpaircraftmanufacturerstoavoidgoingtoabankorfinancialinstitutionformoney.Criticismsexistofsomelargebusinessesthatemploysuchatypeofpaymentmethod.Whencompaniesaskforadvancepaymentsfromordinaryconsumers,itcanbelikeacompanyrequestinganinterest-freeloanenmasse.However,itisalsoaneffectivewayofpromotingproductscarcityScarcityScarcity,alsoknownaspaucity,isaneconomicstermusedtorefertoagapbetweenavailabilityoflimitedresourcesandthetheoretical,anditisaneffectivemarketingtool. AdvancedPaymentsinaStartupOneofthecriticalcomponentsofgettingastart-upoffthegroundiscapitalraisingandfunding.Often,entrepreneurslacktheexistingcapitalrequiredtofundandgrowtheirbusinessthemselves.Onlineplatforms,suchasKickstarter,areonewayforbuddingentrepreneurstogetaccesstofundingtobuildtheirproductandtakeittomarket.Withsuchatypeofcapitalraising,interestedcontributorsmakeadvancedpaymentsforproductstheywishtoseethecompanyproduce.Theydoittogetcontributorbonusesortobeamongthefirsttoreceivetheproduct.Suchtypesofadvancedpaymentsarecompletedasauniquewayofbringingproductstomarketthatmayotherwisenevergetlaunched. RiskswithAdvancedPayments:GettingYourMoneyBackOnepotentialdisadvantagethatexistswhenutilizingtheadvancedpaymentmethodasaconsumeristhatyoumayencounterdifficultiesinreclaimingyourcapitalshouldthecompanyyou’reinvestingingobankrupt.Withoutastrongcontractinplacethatcanprotectyourpayment,youmayfindyourselfinadrawn-outlegalbattletoreclaimyourpayment.Theabovehighlightsthecriticalreasonforfullyunderstandingthenatureofanadvancedpaymentthatyouarecontributingtowards.Indoingso,youwillunderstandtheopportunitycostsOpportunityCostOpportunitycostisoneofthekeyconceptsinthestudyofeconomicsandisprevalentthroughoutvariousdecision-makingprocesses.Theofdoingit.PlatformslikeKickstarteroftenemployathresholdbarrierthatcapitalraisersmustobtaintobeallowedtocollectthemoneythey’veraised.Itcanprovidepeaceofmindandaneffectivewayforcontributorstogettheirmoneybackifotherconsumersdonotsharetheiroptimismforaproductorservice,anditbecomesnolongerfinanciallyviable. SummaryAdvancedpaymentsaregenerallypaymentsmadeforagoodorservicebeforeitisdelivered–paideitherinalumpsumorinstallments. Theyarecompletedasawayofcapitalraisingandhelpprovidethenecessaryfundsforcompaniestobuildexpensiveproducts.Advancedpaymentsareawayforconsumerstodemonstratetheircommitmenttobuyingaproductthattakesmanymonthsoryearstocomplete–likeanairplane. Strongcontractshelpmitigatesomeoftherisksinprovidingadvancedpaymentsasaconsumer.Also,advancedpaymentscanbeaneffectivemarketingtoolbypromotingscarcityandcreatingmarketingbuzzaroundanupcomingproduct.PlatformslikeKickstarterprovideaninnovativewayforentrepreneurstoraisemoneythroughtheadvancedpaymentmethodtohelpdeveloptheirproducts. RelatedReadingsCFIistheofficialprovideroftheCommercialBanking&CreditAnalyst(CBCA)™ProgramPage-CBCAGetCFI'sCBCA™certificationandbecomeaCommercialBanking&CreditAnalyst.Enrollandadvanceyourcareerwithourcertificationprogramsandcourses.certificationprogram,designedtotransformanyoneintoaworld-classfinancialanalyst.Tokeeplearninganddevelopingyourknowledgeoffinancialanalysis,wehighlyrecommendtheadditionalresourcesbelow:PrepaymentPrepaymentAPrepaymentisanypaymentthatismadebeforeitsofficialduedate.Prepaymentsmaybemadeforgoodsandservicesortowardsthesettlementofdebt.Theycanbecategorizedintotwogroups:CompletePrepaymentsandPartialPrepayments.InstallmentLoanInstallmentLoanAninstallmentloanreferstobothcommercialandpersonalloansthatareextendedtoborrowersandthatrequireregularpayments.MortgageServicingRights(MSR)MortgageServicingRights(MSR)Mortgageservicingrights(MSR)areaspecificarrangementwhereathirdpartypromisestocollectmortgagepaymentsonbehalfofalenderinexchangeforaStartupValuationMetricsStartupValuationMetrics(forinternetcompanies)StartupValuationMetricsforinternetcompanies.Thisguideoutlinesthe17mostimportante-commercevaluationmetricsforinternetstartstobevaluedFinancialAnalystTrainingGetworld-classfinancialtrainingwithCFI’sonlinecertifiedfinancialanalysttrainingprogramBecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.Enrolltoday!!Gaintheconfidenceyouneedtomoveuptheladderinahighpoweredcorporatefinancecareerpath. LearnfinancialmodelingandvaluationinExceltheeasyway,withstep-by-steptraining.