Deposit - What is a deposit?
A deposit is an amount of money paid by a buyer to a seller at the beginning of a sales process in order to secure the sale.
Learn more about how to invoice for a deposit.
An optional part of the sales process, a deposit is a specified amount of money (usually a percentage of the total amount) that is paid upfront in order to ensure that the sale will go through and that the products/service will be provided.
A deposit is paid by the buyer to the seller before a sale is completed. A deposit is usually refundable up until a certain date. In some cases, a deposit is non-refundable, meaning that if the buyer cancels the sale or is unable to pay for the sale, they will not receive the deposit amount back.
However, if the sale is followed through successfully, the deposit will be applied to the final payment amount - considered as a down payment.
When to use a deposit
The use of a deposit can be helpful for certain businesses. It’s commonly seen in real estate or in letting property, or as a security deposit in vehicle rentals, for example. A deposit can also be used when the sales process is lengthy or the final delivery or the product or service will occur at a later date.
It’s up to the discretion of the seller whether to require a deposit on their sales. For example, if a sale seems particularly risky due to large volume or other circumstances, a deposit might make the seller feel more comfortable continuing with the sale.
In this way, a deposit functions as a type of collateral for the total sale amount, providing increased confidence in the sale.
Why use a deposit?
Deposits are most often used when there is a valuable asset provided for use to the buyer or renter, or to secure the full payment of a product or service being provided at a later date. A deposit provides an added level of security for the seller by creating a binding, often non-refundable agreement for full payment once the sale is completed.
Deposit vs. down payment
The term ‘deposit’ is often used interchangeably with ‘down payment’. In many cases, this is not incorrect. However, in some circumstances, there is a distinct difference.
A deposit is the upfront payment made before the sale is completed. A down payment is an amount typically paid at the time of sale, which represents an initial amount while the rest is funded by a loan or, in the case of property, a mortgage.
In many cases when a deposit is used, this amount becomes part of the down payment or is applied to the payment of the total amount.