Advance payment is paid for a product or service before the item or service is delivered to the customer. For example, it may be demanded of the customer to guarantee a down payment on the item or service in question or to advance money to pay for manufacturing costs.
Obtaining Payment in Advance
The remaining balance of the payment may be needed in instalments as a continuation of an advanced payment plan, or it may be paid after the transaction upon delivery of the product or service. The cash supplied as part of an advanced payment may be a crucial component of a company’s financing structure, particularly when acquiring costly equipment or the logistical services.
Payments in Advance in Big Corporations
For companies that produce big, costly pieces of equipment – such as fighter aircraft or commercial airliners – advance payments are often required as part of the payment arrangement for product delivery. There are a variety of reasons why it is in their best interests to take this action. The first is that it demonstrates the buyer’s commitment to the product’s delivery by demonstrating that they are committed to its delivery. In this case, particularly if the money is non-refundable and large, it is a big gesture.
The second reason is that it offers money to finance large-scale initiatives that are otherwise unaffordable. According to the previous example of the aeroplane project, it can offer the required money to build something that might cost several hundred million dollars. It will assist aircraft makers in avoiding the need to borrow money from a bank or financial organisation.
Payments in Advance for a New Business
One of the most important aspects of getting a start-up off the ground is obtaining money and securing financing sources. Most of the time, entrepreneurs do not have the current money necessary to finance and expand their businesses independently. Online sites, such as Kickstarter, provide aspiring entrepreneurs with a means of obtaining financing to help them develop their products and get them to market faster.
The Risks of Making Advance Payments: Getting Your Money Back
Consumers who use the advanced payment method may have problems recovering their funds if the business they have invested in goes bankrupt. This is a possible drawback of using the advanced payment method. If you do not have a solid contract in place that can safeguard your payment, you may find yourself amid a protracted court fight to recover your money.
The above emphasises the essential need to thoroughly comprehend the nature of an advanced payment to which you are contributing. You will get a better understanding of the opportunity costs associated with doing so.
In the case of an aircraft, advanced payments are a method for customers to show their commitment to purchasing a product that will take months or years to finish. As a consumer, strong contracts may assist in minimising some of the risks associated with making advance payments.
