Accepting Advance Online Payments: What Is Advance Billing?

By Author: Sahil Verma
Total Articles: 160
Comment this article

One of the most significant risks that businesses face is the provision of goods and services without payment.

While this is often how things are done in business, it does not imply that there isn't another option. Alternatively, you could require advance payments for your goods and services, or just for specific projects.

Advance payments are a risk-reduction strategy that ensures you have the working capital you need right away. However, if you accept advance payments through online payment gateway, you must properly account for these deposits or full payments.

If you want to try this billing method but don't know where to begin, we've got you covered. This guide will explain what advance billing is, the benefits of using it, and how to process advance payments.

What is an advance payment?

Advance payment is a type of payment made prior to the performance of a service. In the case of advance billing, invoices are sent to clients before the project is completed. Advance payments can take the form of a deposit, a partial payment, or a full lump sum. Progress ...
... payments, for example, are a type of advance payment because they are partial payments for work that has already been completed.

There could be several reasons for charging advance payment, including:

To cover the cost of materials for a project with significant out-of-pocket expenses

As a precautionary measure, especially for larger orders

To reduce the risk of nonpayment in a business.

Customers will be able to reserve goods on preorder.

The customer requests payment in advance, which could be the case if they use cash-basis accounting or want a transaction included in this tax year.

With many businesses facing financial uncertainty as a result of the coronavirus pandemic this year, more may consider advance billing. It's a simple way to get money into your hands faster so you can meet your current financial obligations until COVID-19 restrictions are lifted. Selling gift cards that can be redeemed once your business reopens or selling tickets that can be redeemed later for future events are two examples.

How do advance payments work?

To collect an advance payment, your company must first estimate the budget for the goods or services that will be purchased. It's critical to be as precise as possible because it reduces the possibility of overcharging and having to issue a refund or reimbursement. This is especially true when it comes to project scoping.

You must record the transaction once you have sent the invoice and received payment from the client.

We'll go over how to account for and process payments in greater detail later.

Pros and cons of advance payments

While it may appear that receiving your money in advance can only benefit your business, there are both benefits and drawbacks to advance payments through the best payment gateway India.

Pros:

The project will be funded in advance, lowering your chances of losing money.

The project's revenue and expenses are recorded in the same period.
The need to pursue collections is uncommon.

It is simpler to maintain a consistent cash flow.

The process of setting up automated invoices has been streamlined.

Cons:

Customers may be hesitant to pay in advance, especially if they have never worked with you before.

Changes to the scope of a project must be applied to the next invoice.
It is more difficult to issue refunds.

So, what are your options if the disadvantages have made you doubt that advance billing is right for your company? Billing in arrears, also known as deferred payment, may be more appropriate for your company's operations.

Advance billing vs. billing in arrears

Billing clients have two general options: advance billing and billing in arrears. When you invoice a customer before the service or work is completed, this is known as advance billing. When you bill a customer after the work has been completed, you are billing in arrears.

Depending on your needs and preferences, one billing method may be preferable to the other. Each billing method has its own set of benefits and drawbacks.

Let's look at the distinctions between advance billing and invoice in arrears:

You have the startup capital to use toward the project if you bill in advance. However, some customers are hesitant to pay in advance when they haven't seen the finished product.

Billing in arrears allows you to demonstrate the quality of your work before requiring payment. Billing in arrears is thus an easier way to build trust with your clients. You must, however, trust your clients to pay their bills.

You don't have to worry about following up for payment when you use advance billing. If additional work or materials are required, you must charge the customer on a separate invoice, which means you will not be paid until later.

You run the risk of having to constantly follow up with clients for payment if you bill in arrears. These unpaid invoices may fall through the cracks in some cases. However, even if changes occur, you can include the total for everything involved with the project on a single invoice.

You run a higher risk of having to issue a refund when using advance billing. This can occur when a client cancels a job before it is completed or when the job is completed for less than the original quote.
Refunds are much more difficult to obtain when billing in arrears because payment is not received until completion.

Consider these distinctions as well as the nature of the services you provide when deciding on the best billing method. Generally, advance billing is preferable for recurring clients with repeat projects, whereas billing in arrears is preferable for one-time projects that may change. You could even start with billing in arrears for the first payment, then switch to advance payment for subsequent projects. This could be an important part of developing client relationships.

How to account for advance payments

The accounting process differs depending on whether you are making or receiving advance payment. We'll go over both scenarios in more detail below.

When you receive an advance payment from a client

When you receive a client advance payment through an online payment gateway India, you will record it as a liability. To accomplish this, debit the cash account and credit the liability account. Then, when the job is finished or the goods are delivered, you will complete the revenue recognition process. By debiting the liability account and crediting the revenue account, this is accomplished.

On the balance sheet, unearned income is recorded. Once the goods or services are delivered, the amount can be recorded on the income statement as earned revenue.

When you make an advance payment to a supplier

Advance payments to suppliers are recorded on the balance sheet as a prepaid expense if your company uses the accrual accounting method.