Advance Payment What It Is

Advance payment is a type of payment made ahead of its normal schedule such as paying for a good or service before vendor portal you actually receive it. Advance payments are sometimes required by sellers as protection against nonpayment, or to cover the seller's out-of-pocket costs for supplying the service or product.There are many cases where advance payments are required. Consumers with bad credit may be required to pay companies in advance, and insurance companies generally require an advance payment in order to extend coverage to the insured party.

Advance payments can assist producers who do not have enough capital to buy the materials to fulfill a large order, as they can use part of the money to pay for the product they will be creating. It can also be used as an assurance that a certain amount of revenue will be brought in by producing the large order. If a corporation is required to make an advance payment, it is recorded as a prepaid expense on the balance sheet under the accrual accounting method.

There are many examples of advance payments in the real world. Take prepaid cell phones, for example. Service providers require payment for cell services that will be used by the customer one month in advance. If the advance payment is not received, the service will not be provided. The same applies to payments for upcoming rent or utilities before they are contractually due.