Advance Invoicing: When, Why and How to use it

It can be hard to protect your own business interests when it comes to negotiating payment terms.  

“If your enterprise is dealing with larger, corporate customers, you might find you’re under pressure to go along with 60- or even 90-day payment terms because that’s what suits them,” says Andy Smith, founder of Abbeygate Accountancy. 

“The problem is that, if your business expenses need to be paid before you’re paid by a customer, that puts pressure on your cash flow.” 

Even if you manage to negotiate agreeable terms, there's no guarantee that your clients will stick to them. According to a recent survey, 51% of UK businesses have been affected by delays in receiving payments for goods and services, with £17.5 billion in late payments owed to businesses in 2020 [1].  

For some companies, the best way to avoid this issue is through advance invoicing – where customers make partial or total payment upfront. This article explores the key facts about advance invoicing, including its advantages, disadvantages, and best use cases. 

What is advance invoicing?  

Advance invoicing refers to a company requesting partial or complete payment from a customer before goods or services are delivered. It can take several forms:  

• Requesting payment in full before work commences. 
• Requesting a percentage of the total invoice value as a deposit. 
• Requesting staged payments throughout the course of work delivery.  

The type of advance invoicing used will depend on the reasons for advance billing, but the goal in each case is to reduce your risk and ensure you have the working capital you need to complete work upfront.   

For example, companies often request payment in full before producing a bespoke or personalised item, while staged payments work well when your company needs to make regular, large payments for materials or services throughout a longer project. Asking for a deposit is a useful approach if you have limited stock, or if your business sees high volumes of order cancellations and wants to reduce that risk.  

When to use advance invoicing  

Advance invoicing is ideal for customers when:   

• There are significant upfront costs in delivering a product or service, and your business needs the capital to be able to deliver this effectively.  
• There is a significant risk of non-payment. For example, if the order is very large, or the customer is unknown to you.   
• Stock is limited and the customers wants to be able to ‘reserve’ a particular product in advance of delivery.  
• There is an ongoing relationship where regular invoices are issued to a customer, such as a monthly service retainer or product subscription.  
• Products or services are highly bespoke, meaning a high risk of wastage if the customer cancels or reduces the order before delivery.   

Miss Nang Treats is a company that specialises in providing vegan snack products to cafés and hotels. The business buys raw materials that are perishable, so uses advance invoicing to minimise risk of wastage.  

“We usually ask for between 50% and 75% of the contract value upfront, and the balance on delivery," says Hortense Julienne, the company’s founder. "We find this means clients are less likely to back out of orders, leaving us with unsold stock and unpaid orders. 

“For regular clients, we might extend payment terms, but as a small business we rely on advance invoices because we can’t afford to take wastage risks.”  

How to use advance invoicing  

When your business uses advance invoicing, it's important to be as accurate as possible with your estimation of cost, as this reduces the risk of overcharging and having to issue a refund or reimbursement. 

It's also important to record the payment correctly in your accounts. Unearned income is recorded on the balance sheet, and can only be transferred to the income statement once the product has been delivered or the service completed. 

“When you receive advance payment for a product or job that you haven’t completed yet, that payment is a liability rather than revenue,” Smith says.  

To record an advance payment as a liability, you will need to debit the cash account and credit the liability account. Once the work has been completed, you can then transfer the amount earned from the liability account to the income statement as earned revenue. 

Advantages of advance invoicing 

By sending an invoice earlier, businesses have better visibility of when payments will be received. Asking for payment upfront helps businesses to protect cash flow, since a small number of late payments of large invoices could mean a business can’t function, says Smith.  

Using advance invoicing can make it easier to automate invoices on small orders, reducing admin costs and freeing up administrative resources. In some cases, advance invoicing can also be more convenient for customers.   

Disadvantages of advance invoicing 

Advance billing is common in certain sectors, for example PR, marketing, and graphic design, where campaigns and materials are specific to a single customer. But it should be avoided in industries where it isn’t the standard, since it could make your company less attractive to new customers, says Smith.  

Some customers might not be comfortable paying for a service or product before they have received the ‘final product’. There is also the risk that the amount you invoice could be too low – for example, if a customer requires additional product volume or if a service takes longer to deliver than expected. It could then be difficult to negotiate the higher payment with your customer.   

Another potential downside of advance invoicing is that it gets complicated when projects change but invoices have been based on staged payments. “For example, a design company might start work on a £20,000 project but halfway through, the scope of the project changes, and future invoices might need to be reduced or cancelled altogether,” says Smith. “That could be a problem if you’re reliant on that revenue to keep your business running.”  

Companies using advance invoices need to think about how they will handle payments if customers want to cancel an order or request a refund for an invoice they have already paid. 

"If we get a cancellation, our contract states that payments made as deposits aren’t refundable," says Miss Nang's Julienne. "With corporate clients, we offer to apply a credit to their account rather than a refund, which is easier from an accounting point of view.”   

[1] Chartered Institute of Credit Management (CICM), September 2021

A version of this article was originally published October 12, 2022.