Cash in advance
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The buyer pays the seller before the goods are shipped, so the seller ships with the money already in hand.
Terms like this have a quick explainer. Tap or hover on them.
01 · In plain words
The buyer pays first, and the seller ships once the money has arrived
is a way to pay for goods. The buyer pays all of the price, or a large part of it, before the goods are shipped. The payment is usually made by credit card or by , a bank-to-bank payment (US International Trade Administration).
With this , the money reaches the seller before the goods ship. The money arrives before the goods change owner, so the seller avoids the risk that the buyer will not pay (US ITA, Methods of Payment).
The buyer has paid but has no goods yet. Importers worry that the goods may not be sent after they pay (US ITA).
Banks only move the money here. In the basic deal, no bank promises to pay and no bank checks the shipping papers. The sales contract sets the currency. The side that pays or gets paid in a currency other than its own carries the .
Who is involved
- The seller, or , receives the money and then ships the goods.
- The buyer, or , pays before shipment and before the goods arrive.
- The buyer's bank sends the payment, and the seller's bank receives it.
02 · How it works
Six steps take the deal from the sales contract to the goods at customs
Figure 1 · Interactive
Cash in advance, step by step
Read down the steps. The money moves before the goods do.
Source: US International Trade Administration, Trade Finance Guide, July 2022, Chapter 3, on payment before shipment and on wire transfers.
03 · What it means for you
The seller is paid before it ships, and the buyer carries the risk until the goods arrive
Figure 2 · Interactive
What cash in advance means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million prepayment, the buyer's illustrative cost of funds is $4,166.67 for 30 days
This example uses round, made-up numbers. The buyer pays $1,000,000 up front. Say the buyer pays 5.00% a year to use that money. We count a year as 360 days. The cost grows with each day between paying and receiving the goods. The seller holds the cash for that time.
Figure 3 · Illustrative
Buyer's cost of funds on a $1,000,000 prepayment at 5.00% a year
Illustrative inputs. The 60-day case is highlighted.
Made-up rates. Cost = prepayment x yearly rate x days / 360.
05 · When to use it
Cash in advance suits high-risk markets and small sales
Good fit when
- The trade relationship or the export market carries high risk (US ITA).
- The sale is small (US ITA).
- The buyer is new and has no payment record with you, or you make the goods to order and need the money to produce them.
Another tool may suit better when
- The buyer will not pay before shipment. Look at a sight letter of credit, where a bank promises to pay, or a documentary collection (D/P).
- The buyer needs the goods, or the money from reselling them, before paying. Look at open account.
- The buyer wants its advance protected. Pair the advance with a bank guarantee.
06 · Rules and a real case
The sales contract sets the terms, and the US ITA shows where cash in advance fits
The sales contract and the delivery term the two sides choose set the rules here. The ICC's define eleven three-letter delivery terms, such as FOB and CIF. They have been in force since January 1, 2020 (ICC). The wire transfer itself follows the rules of the payment system that carries it.
A real example. The US International Trade Administration's Trade Finance Guide, published in July 2022, puts cash in advance first among its payment methods. It says full or significant partial payment is required, usually by credit card or wire transfer, before the goods are shipped. It recommends cash in advance for high-risk trade relationships or export markets, and says it suits small export sales (US ITA, Trade Finance Guide, Chapter 3).
Summary
Cash in advance protects the seller and asks the buyer to trust the seller
The buyer pays before shipment, so the seller avoids the risk of not being paid. The buyer carries the risk until the goods arrive, and its money is tied up for that time. The US ITA recommends it for high-risk markets and small sales. When the buyer will not pay first, other payment terms can share the risk.
Related guides: The payment terms spectrum; Buyer, country and performance risk; Incoterms. Related cards: Open account; Letter of credit (sight); Demand guarantee (bank guarantee). Every term is in the Trade Finance Glossary.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), Chapter 3, July 2022. Supports: definition, payment by credit card or wire transfer, wire transfers being common and almost immediate, importers' concern, when cash in advance fits, the real example
- US International Trade Administration, Methods of Payment, undated. Supports: the exporter avoiding the risk of non-payment
- International Chamber of Commerce, Incoterms 2020, in force January 1, 2020. Supports: the eleven delivery terms
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