Advance payment is a method in which the buyer pays the seller before goods are shipped or produced, offering maximum security to the seller and the most risk to the buyer.
Advance payment is a trade payment method in which the buyer pays the seller before the goods are produced or shipped. It offers the seller the greatest possible security — payment is received upfront — and places the most risk on the buyer, who pays before receiving anything.
Advance payment sits at one end of the trade payment spectrum, opposite open-account terms where the seller ships before being paid. In practice, it is often used partially, as a deposit, to balance risk.
Under advance payment, the buyer transfers funds — commonly by TT (Telegraphic Transfer) — before the seller begins production or dispatches the goods. This is common for small orders, first transactions with a new buyer, or custom-made goods, where the seller wants to cover material and production costs and confirm the buyer's commitment.
Advance payment protects the seller from the risk of producing goods that are never paid for. It funds the purchase of materials, confirms that the buyer is serious, and eliminates credit risk for the seller. For made-to-order or custom products, and for suppliers meeting a minimum order quantity, an advance is often a reasonable request.
The buyer's main risk is paying before receiving the goods. If the supplier fails to deliver, delivers late, or ships defective or non-conforming goods, recovering the money can be difficult — especially across borders. This is why advance payment demands careful supplier due diligence.
Advance payment favours the seller; open account favours the buyer. Between them sit documentary collection and the Letter of Credit, which share risk more evenly and add bank involvement. As trust between the parties grows, buyers often negotiate away from full advance payment toward deposits or documentary methods.
Advance payment gives sellers maximum security by requiring payment before production or shipment, but it exposes buyers to the risk of paying for goods they have not yet received. Using partial deposits, verifying suppliers, and paying balances against documents or inspection allows buyers to manage that risk. For higher-value orders, more balanced payment methods may be preferable.