Down payment and payment in advance

paiement à la commande Get the payment of an order before doing the delivery or the service requested is the easiest way to avoid any risk of default payment.

In addition, the effect on your cash flow is excellent because you get paid before you have to pay your own suppliers.

The only problem is that this mode of payment is very restrictive for your customers especially if they are in a precarious financial situation with tight cash.

Under these conditions it will be difficult to establish sustainable business relationships. That's why it is sometimes better to request a "partial payment in advance" also called a down payment. The order amount percentage of the down payment depend on the credit limit allowed to your customer and the commercial negotiation.

The payment in advance

payment in advance

 Proforma invoice issued by the seller. This document is a bill "for form’s sake" which includes informations of price, delivery time and payment method.

This is a document similar to a quotation. It allows the buyer to justify an outflow of money to the seller when the final invoice is not issued yet.

 The buyer pays the seller the amount specified on the proforma invoice (VAT included).

 The seller makes the delivery and issue the final invoice.
Offering a discount to your client when you request a payment with order. His margin will be improved which will at least partially compensate the cash advance from a financial and psychological standpoint.

The down payment

Less restrictive for the buyer and less safe for the seller (only part of the business offer is paid in advance, usually between 20% and 50%), the down payment is very interesting for companies who request it systematically to their customers. It contributes to reduce the risk, the daily sales outstanding (DSO) and the working capital requirement.

The positive effect on the cash flow and  the working capital requirements is high and the reception (or not) of the first payment can assess the financial health of your customer. If the buyer is not able to pay 20% down payment with the order, how can he pay the full amount 30 or 60 days later?

If your client is unwilling to pay you a deposit while you have not yet delivered (he is not sure that you will deliver the material. Paying an advance is a risk for the buyer), offer him to implement in his favor an advance payment bank guarantee. In case of problem (unfulfilled commitments of the seller), he will be easy for him to get back his money without delay with this guarantee. See our models of advance bank guarantees below.
Include down payment requests in your sales conditions and trade policy. The benefits are numerous and are converging to improve your DSO and your unpaid prevention.
Providing your customer with a bank guarantee for advance payment is a proof of your good faith. It is also an additional argument to negotiate downpayments or payments in advance.

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