# Understanding Advance Payments: Definition, Benefits, and Examples

![Advance Payment](https://www.investopedia.com/thmb/kTNJZubqkDKRK7_W-FoB8D3Qmsk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/advance-payment.asp_Final-795722b5d94e45ceaeedaf99853928f4.png)

*— Investopedia / Dennis Madamba*

## What Is an Advance Payment?

Advance payments involve funds paid before receiving goods or services, often as a protective measure for sellers against nonpayment. They are recorded as assets on the balance sheet and expensed once delivery is completed. Examples include prepaid phone services and rent payments.

### Key Takeaways

*   Advance payments are made to protect sellers from nonpayment and are credited as assets on a company's balance sheet.  
    
*   Advance payment guarantees serve as [insurance](https://www.investopedia.com/terms/i/insurance.asp) for buyers, ensuring a refund if the seller fails to fulfill the contract.  
    
*   Examples of advance payments include prepaid cell phone services, rent, and utility payments.  
    
*   Companies often require advance payments from consumers with bad credit to mitigate financial risk.  
    
*   The Affordable Care Act's Premium Tax Credit is an example of advance payments made for health insurance coverage.

## How Advance Payments Work and Their Benefits

Advance payments are amounts paid before a good or service is actually received. The balance that is owed, if any, is paid once delivery is made. These payments differ from [deferred](https://www.investopedia.com/terms/d/deferred-billing.asp) or arrears payments. In these cases, goods or services are delivered first, then paid for later. For example, an employee who is paid at the end of each month for that month's work would be receiving a deferred payment.

Advance payments are recorded as assets on a company's balance sheet. As assets are used, they are expensed and noted on the income statement for the relevant period.

Advance payments are generally made in two situations. They can be applied to a sum of money provided before a contractually agreed-upon due date, or they may be required before the receipt of the requested goods or services.

## Ensuring Security With Advance Payment Guarantees

An [advance payment guarantee](https://www.investopedia.com/ask/answers/040615/how-does-company-obtain-bank-guarantee.asp) acts as insurance, ensuring a refund if the seller doesn’t meet their obligation. This protection lets buyers void the contract and reclaim their initial payment if the seller fails.

> **Important**
>
> Governments also issue advance payments to taxpayers like Social Security.

## Important Considerations for Supplier Advance Payments

In the corporate world, companies often have to make advance payments to suppliers when their orders are large enough to be burdensome to the producer. This is especially true if the buyer decides to back out of the deal before delivery.

Advance payments help producers lacking capital for materials by letting them use the funds to create the product. It can also be used as an assurance that a certain amount of revenue will be brought in by producing the large order. If a corporation is required to make an advance payment, it is recorded as a prepaid expense on the balance sheet under the [accrual accounting](https://www.investopedia.com/terms/a/accrualaccounting.asp) method.

## Real-World Examples of Advance Payments

There are many examples of advance payments in the real world. Take prepaid cell phones, for example. Service providers require payment for cell services that will be used by the customer one month in advance. If the advance payment is not received, the service will not be provided. The same applies to payments for upcoming rent or [utilities](https://www.investopedia.com/terms/u/utility.asp) before they are contractually due.

Another example applies to eligible U.S. taxpayers who received advance payments through the Premium Tax Credit (PTC) offered as part of the [Affordable Care Act (ACA)](https://www.investopedia.com/terms/a/affordable-care-act.asp). The financial assistance helps citizens, that meet household income requirements, pay for their health insurance. The money due to the taxpayer is paid to the insurance company in advance of the actual due date for the credit.

> **Important**
>
> The American Rescue Plan, signed by President Biden on March 11, 2021, made some changes to the ACA Premium Tax Credit. All taxpayers with insurance bought on the Marketplace are now eligible for this credit in 2021 and 2022; previously, filers were ineligible if their income exceeded 400% of the federal poverty line.

Consumers with bad credit may also be required to provide creditors with advance payments before they can purchase goods or services.

## The Bottom Line

Advance payments involve paying for goods or services before they are received and serve as a safeguard for sellers against potential nonpayment. These payments are recorded as assets on the balance sheet and are utilized in various scenarios, including insurance, prepaid cell services, and large orders in the corporate sector. Understanding how advance payments work and when they are required can help consumers and businesses manage financial transactions more effectively.  

> **Article Sources**
>
> 1.  Social Security Administration. “[2187\. Direct Field Office Payments](https://www.ssa.gov/OP_Home/handbook/handbook.21/handbook-2187.html).”
>     
> 2.  Cornell Law School. “[Advance](https://www.law.cornell.edu/wex/advance).”
>     
> 3.  Internal Revenue Service. "[The Premium Tax Credit - the Basics](https://www.irs.gov/affordable-care-act/individuals-and-families/the-premium-tax-credit-the-basics)."
>     
> 4.  Internal Revenue Service. “[Premium Tax Credit: Claiming the Credit and Reconciling Advance Credit Payments](https://www.irs.gov/affordable-care-act/individuals-and-families/premium-tax-credit-claiming-the-credit-and-reconciling-advance-credit-payments).”
>     
> 5.  U.S. Congress. "[H.R. 1319](https://www.congress.gov/117/bills/hr1319/BILLS-117hr1319enr.pdf)," Page 180.
>     
> 6.  Consumer Financial Protection Bureau. “[Fair Credit Reporting Act](https://files.consumerfinance.gov/f/documents/102012_cfpb_fair-credit-reporting-act-fcra_procedures.pdf),” Page 6.