Being a small business owner is rewarding, exciting and can be incredibly lucrative. But it also comes with its challenges. One of these is cash flow management: making sure that your business’ finances are running smoothly.
While there are many ways to overcome cash flow problems, one of the most effective is to secure upfront payment terms. In this article, we highlight how you can do it.
What is an upfront payment?
In simple terms, an upfront payment allows a business to collect payment (either in full or with a partial payment) before they’ve delivered the service or goods. Sales contracts will often include upfront payments, and the supplier and their customer will negotiate payment before the supplier agrees to take on any work.
We discuss how you can secure upfront payment terms from your customers below.
{{iwoca-pay-cta="/components"}}
How to secure upfront payments from customers
It pays to start early when securing upfront payment terms with your customers. In fact, you should try to get into the habit of talking about it when first discussing payment arrangements. That way, it won't come as a surprise if you try to change your contract at a later date.
Some tips for when you’re asking for upfront payment terms
- Understand that your customers need time to pay and might be waiting on suppliers themselves
- Offer customer financing, allowing your customers to pay upfront or spread the cost over 3 monthly instalments (while you get paid upfront)
- Send automated email reminders to prompt customers when it’s time for them to pay (but don’t spam them)
- Use accounting software like Xero (with iwocaPay integration) to track overdue payments and offer new solutions - such as customer financing
The benefits of upfront payment
There are many benefits of receiving upfront payments. These include:
- better cash flow: by securing upfront payment terms, you’ll be able to project cash flow and cover expenses more confidently
- less risk: your business will be in a better position to pay staff on time, settle bills and weather any unforeseen difficulties
- boosted credit rating: with a positive cash flow, your credit rating will also improve, which is great for your finances and your brand reputation
- more protection: by receiving payments upfront or in instalments, you won’t stand to lose all the money for your work if the business you're dealing with goes under before you’ve completed it.
If you use a payment solution like iwocaPay, you won’t have to worry about losing business due to failed negotiations. Your customers can choose to pay upfront or across three monthly instalments, and you’ll be paid upfront every time. It’s a win-win.
The difference between an upfront payment vs a down payment
An upfront payment – as above – is one that you’ll receive before you’ve done any work or delivered any goods. A down payment is different. Take a look at these comparisons between upfront payments vs down payments:
Percentage: upfront payments can total the full amount, whereas a down payment is usually a portion of the price.
Usage: down payments secure a service or goods for the buyer, and upfront payments help to minimise credit risk for the seller.
Amount: suppliers will often use down payments when selling expensive items, while upfront payments can be used for most types of payments.
Collecting upfront payments
There are lots of different payment methods for businesses to consider when collecting funds from customers. These range from bank transfers to card payments, direct debit, or cash.
Offering customer financing is our favourite option when collecting upfront payments. You can collect payments in just two clicks, so there’s no need to provide a bank account number or ask for card details.
Meanwhile, customers can spread payments while you get paid upfront. So, you won’t need to worry about negotiating favourable terms - making both parties happy.
FAQs
An upfront payment is when a customer pays for at least part of a service before it's completed. While requesting upfront payments isn't applicable to all situations, there are some instances where it might be beneficial both to the business and client.
What are upfront payment terms? ›
An upfront payment is a type of advance payment method where a customer or client pays you for work before it begins.
How does Iwoca pay work? ›
How does it work? Once you're signed up all you need to do is add the option to pay via iwocaPay to your invoices, online checkout or POS. Your customer chooses to Pay Now or Pay Later - Stand apart from the competition by letting your customers choose how they pay, without taking on the risk.
What is the difference between upfront payment and advance payment? ›
Advance payment and upfront payment are similar, but advance payment usually refers to payment made before delivery or completion, while upfront payment refers to payment made at the beginning of a project or service.
How do you explain payment terms? ›
Payment terms provide clear details about the expected payment on a sale. Often, payment terms are included on an invoice and specify how much time the buyer has to make payment on the purchase.
How do you account for upfront payments? ›
Whenever an advance payment is made, the accounting entry is expressed as a debit to the asset Cash for the amount received. A credit also needs to be made to the liability account – something along the lines of Advance Payments, Unearned Revenue, or Customer Advances.
What are the disadvantages of upfront payments? ›
Risks Associated with Upfront Payment
One significant risk is the possibility of non-delivery or non-performance by the seller. In case the seller fails to fulfill their obligations, the buyer may face difficulties in obtaining a refund or recovering the upfront payment.
Is upfront payment a full payment? ›
What is an upfront payment? In simple terms, an upfront payment allows a business to collect payment (either in full or with a partial payment) before they've delivered the service or goods.
How to convince a client to make an upfront payment? ›
How do you convince a client for advanced payment? I would suggest that you first explain to the client why it is important for them to pay in advance. For example, you can mention that by doing so they will be helping your business grow and allowing you to provide a better service.
What does Iwoca stand for? ›
So when our founders, Christoph and James, were looking for a short snappy name, they looked no further than that mission brief. Instant working capital. i-wo-ca.
Christoph Rieche is the co-founder and CEO of iwoca and a leading figure within the fintech sector. Christoph is passionate about helping small businesses thrive and grow.
What is loan pay express? ›
LoanPay Xpress is a quick and easy way to make loan payments from the convenience of your home, or on a smartphone 24/7. You can even use a credit or debit card to make a loan payment.
What does payment terms upfront mean? ›
An upfront payment policy requires that customers pay a deposit before you start or finish a project. This is common among contractors, freelancers, and service-based businesses. Upfront payments can be: Flat-rate deposits (e.g., $1,000) Percentage-based deposits (e.g., 25% of the total estimate)
Is upfront payment refundable? ›
It is common in some industries for reporting entities to charge customers a fee at or near inception of a contract. These upfront fees are often nonrefundable and could be labeled as fees for set up, access, activation, initiation, joining, or membership.
What is a synonym for upfront payment? ›
advance fee early payment startup money.
What is the description of advance payment? ›
Advance payment is a kind of payment made in advance of its normal schedule, such as payment for a good or service before you actually receive it. Advance payments sometimes are needed by sellers to protect against non-payment or to cover out-of-pocket service or product costs.
How do we define upfront expenses? ›
What Is an Upfront Cost? An upfront cost is an initial sum of money owed in a purchase or business venture. Perhaps the most common iteration of upfront costs is the package of fees owed by home buyers.
What does paying you upfront mean? ›
If a payment is made up front, it is made in advance and openly, so that the person being paid can see that the money is there.
How to politely ask clients for an upfront deposit? ›
I am writing to discuss the payment arrangements for the [project/service] we will provide. I truly appreciate the opportunity to work with you on this project and I am confident that we can deliver excellent results. As we move forward, I kindly request an advance payment to initiate the project/service.
