Cash in Advance: Definition, Benefits, Alternatives

What Is Cash in Advance?

Cash in advance is a payment term used in some trade agreements. It requires that a buyer pay the seller in cash before a shipment is received and oftentimes before a shipment is even made. Cash in advance is a provision that can be required in any transaction in which there is a delay between the sales agreement and the sales delivery.

Understanding Cash in Advance

Cash in advance payment methods are used to eliminate credit risk, or the risk of non-payment, for the seller. In general, the structure of cash in advance transaction fully benefits the seller and poses risks for the buyer. Cash in advance payments are not necessarily uncommon trade terms, but the risks for a buyer increase if the seller or network they are dealing with is not highly credible.

Cash in advance terms can be associated with any sales transaction in which goods or services are not provided immediately onsite, such as in brick and mortar sales, but rather delayed through a shipping process. Two areas where cash in advance terms can be common include online marketplaces and international trade.

In a transaction with cash in advance terms, the seller requires the buyer to make the entire payment upfront in order to initiate the process of shipping the expected goods. This protects the seller from lost money for goods shipped without payment and also alleviates any need for collections recourse.

In some cases, cash in advance arrangements may allow the buyer to pay immediately before ownership is transferred, through cash on delivery. However, most often pre-payment is fully made through wire services or online payment portals using a credit card, debit card, or bank account. The risks of cash in advance payments typically do not make it the preferred option for most buyers.

Cash-in-Advance Markets

Online marketplaces and international business trade are two areas where cash in advance payments can be the most common. Most consumers and businesses are comfortable with making e-commerce purchases through well-established businesses like Walmart, Target, and Home Depot.

Buyers will typically make online cash in advance payments without much research or perceived risk. However, risks can increase as online businesses become less transparent. Amazon and eBay move somewhat higher up on the risk spectrum.

Contingent Guarantees

As such, both offer contingent guarantees backing sales from their sellers. Amazon guarantees a refund if the goods never arrive. On the eBay platform, eBay also has a money back guarantee for most items. In all cases of seller delinquency, eBay is involved in evaluating each case for monetary refunds if items are not received.

International business trade can involve a variety of businesses ranging from small companies to large conglomerates. Businesses that do not want to deal with the risks of inventory write-offs will require cash in advance payment terms.

Generally, a business’s decision to institute cash in advance payments will depend on its risks. Larger businesses may have greater latitude to offer better payment terms for buyers because their accounts receivable and collections processes are more advanced. Smaller companies may not have the advantages of full-service accounts receivable and collections support. At small companies, write-offs for uncollected payments may also lead to unmanageable losses.

Key Takeaways

  • Cash-in-advance payment terms require a buyer to make payment prior to receipt of purchased goods.
  • Cash-in-advance terms can be associated with any sales transaction in which goods or services are not provided immediately.
  • Cash in advance is the best payment option for sellers but is not always used because of industry standards or competition.
  • Companies can choose from a variety of payment terms and will typically choose payment terms that appropriately manage their own risks while remaining comparable to competitors.

Alternatives to Cash in Advance

Online cash in advance payments are generally the standard for e-commerce transactions; however, they are not necessarily standard or preferred for most business buyers. Cash-in-advance transactions for businesses can disrupt cash flow, create inconvenience, and create competition that can be easily avoided by offering multiple types of payments terms. As such, business sales transactions involving delayed delivery will typically include a few different options.

Cash in advance is one of several payment terms a company can choose to institute for buyers.

Depending on the marketplace, contingent guarantees may also be available for business sellers. In complex markets—specifically, in international trade, where risks are high—the next best thing to cash in advance payment terms for sellers can be letters of credit.

Letters of Credit

Letters of credit provide a documented obligation from a financial institution to facilitate payment for the buyer. Letters of credit can be funded or unfunded. A fully funded letter of credit can serve as a type of escrow account in which the bank provides a documented promise that the funds are being held in a separate account for payment once shipping terms have been made and payment has been requested.

Unfunded letters of credit provide a documented promise that the bank agrees to make a payment for the buyer if it cannot do so itself at the time payment is requested. Both funded and unfunded letters of credit can offer the buyer borrowed fund from the financial institution to make a payment to a seller. Funded letters of credit including borrowed funds will usually start charging the buyer interest immediately while unfunded letters of credit begin interest when funds are dispersed if necessary.

Payment Provisions

International business trade transactions are known for offering a variety of different payment provisions that a buyer and seller can integrate into a sales contract to help mitigate risks. Beyond letters of credit, many companies use standard invoicing and collection processes for payments. Companies generally adjust their invoice receivable days to manage for risks and industry standards.

Accounts receivable divisions can also deploy their own delinquent collections programs or hire a third party for support. Many companies will also add penalties for late payments to help manage receivables credit risk. Depending on the business and business terms, companies may also take legal actions to receive payments.

Today, advancing developments are regularly occurring around supply chain and international payment methods through the use of financial technology which is helping to better facilitate and secure business transactions. Overall, the costs of delinquent payment collections and write-offs can be significantly problematic for a business so using cash in advance or other safer payment terms is certainly the best option.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. eBay. "eBay Money Back Guarantee Policy." Accessed May 17, 2021.

  2. Federal Deposit Insurance Corporation. "FDIC Law, Regulations, Related Acts." Accessed May 17, 2021.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.