Advance Billing

Advance Billing

Advance billing is one of the two methods companies use for invoicing customers. While arrears billing waits until customers accrue debt, an advance invoice involves sending a bill before completing the work or delivering products. Whether companies require advance payment on the invoice may vary. For example, some companies require vendors to send an invoice before work but might still pay the invoice within 30 days.

How Does Advance Billing Work?

If your company uses this type of billing, you’ll need to send an invoice to your customers before you begin work or ship products. That way, customers will know they need to pay for the work in advance and know how much to pay. Some industries use this billing method almost exclusively, while some companies move to this method over time.

Why Do Companies Send Invoices in Advance?

There are a few reasons companies might opt for billing ahead. If a company provides services requiring special materials, it may want to send an invoice in advance. Doing so ensures timely payment so it can cover the cost of those materials and contractors can source them in a timely manner.

Similarly, if a company starts a new project with a new customer, it may want to send an invoice before work or delivery to share the risk. Finally, if a company has a large project with many invoices, it may wish to send an invoice for each part of the project. This keeps cash flow moving smoothly and further reduces risk.

What Are the Advantages of Advance Payment on Invoice?

Sending a bill ahead of completing work has a wealth of benefits. Here are some of the many you should review before deciding whether this is the right move for your business:

  • Customers know exactly how much they owe before finalizing an order, so they can adjust according to their budget if necessary.
  • Vendors are more likely to get paid in full and on time, especially if they pause work or delivery until payment.
  • More secure cash flow makes it easier for the company to budget for the future and seize immediate opportunities.
  • Financial security positions the company to receive bigger loans at better terms than its competitors.
  • The accounts receivable team can reduce time spent chasing invoices for work completed.

What Are the Disadvantages of Using an Advance Invoice?

No business strategy is without its risks or disadvantages. Consider the following challenges:

  • Large corporations expect credit and smaller businesses need credit, making it harder to secure customers with an advanced payment model.
  • Project completion and delivery times might become longer when companies wait for customers to pay first.
  • Issuing refunds can become a hassle when projects are not completed or customers submit complaints.
  • Companies need to build a great deal of trust with customers before they can request advance payment.
  • Vendors might need to absorb costs when materials or labor cost more than expected and billed.

How Can A/R Automation Improve Advance Payment Accounting?

If you’ve decided that invoicing ahead of work or delivery is the right move for your business, you’ll need to prep your accounting and invoicing processes. Accounts receivable automation can help you manage customer credit, automate recurring invoices, and track payments. Leverage technology to streamline your accounting process and ensure that customers get the best possible experience.

Businesses across various industries have used Gaviti software to simplify their A/R processes and get paid faster. Book your demo to see what it can do for you.

 

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