What is Advance Payment?

In most business contracts the supplier performs first and the customer pays afterwards, within the agreed payment period. An advance payment reverses that order. Suppliers ask for one when they need to buy materials for a custom order, when the customer is new to them, or when their business model depends on it, as with subscription software billed a year ahead.

Reversing the order also reverses the risk. Until delivery, all you hold is a claim against the supplier. If the supplier becomes insolvent before delivering, that claim ranks as an unsecured debt in the bankruptcy and usually recovers little or nothing. Goods you have paid for but not yet received still belong to the supplier and fall into the estate.

The vocabulary around it is looser than the risk. Advance payment is the umbrella term for any payment that precedes performance. A deposit is one form of it: part of the price paid on signing, often 10 to 30 percent, to confirm the order and fund the supplier's first purchases. Instalment payments spread the price over the term and tie each payment to a date or milestone, such as project start, completion of the shell and final handover. Whichever form you use, record what happens to money already paid if the order is cancelled: offset, refund, or retention by the supplier to cover costs incurred.

Subscriptions carry a quieter version of the same exposure. An annual licence of EUR 18,000 paid in January is rarely refunded pro rata on early termination unless the contract says so, so a decision in March to switch provider still costs the remaining nine months. Gartner (2024) estimates that around 40 percent of SaaS spend goes unmonitored, and a prepaid licence nobody uses any more is the textbook case.

Three provisions keep an advance proportionate. Limit it to the costs the supplier genuinely incurs upfront and tie the balance to delivery or acceptance. On larger sums, ask for an advance payment guarantee from the supplier's bank, which repays the advance if the supplier fails to perform. On phased work, pay per completed milestone rather than everything at the start.

The law also protects the party that has to perform first. Under article 6:263 of the Dutch Civil Code, a party obliged to deliver first may suspend delivery if circumstances arising after signing give good reason to fear the other side will not pay. If a regular customer enters suspension of payments, a supplier may therefore hold further deliveries until the customer pays in advance or provides security.

An advance payment is the point in a contract where the customer depends entirely on the supplier staying healthy. For an SME with tight cash flow it counts twice: the money has left working capital and nothing has come back for it yet.

The risk usually lies less in the payment than in the lack of follow-up afterwards. Weshare (2025) reports that 95 percent of organisations lack full visibility of their contractual obligations. A deposit whose delivery has slipped by three months, or an annual licence that renews and is invoiced upfront again without anyone noticing, sits squarely in that blind spot.

Recording for each contract what was paid in advance, until when, and on what terms it comes back makes a faltering supplier visible while the money can still be recovered.