Down payment - What is a down payment?
Down payments are advance payments made at the beginning of a sale, commonly involved in purchasing expensive goods or services that will require ongoing instalments.
Learn how to invoice with a deposit or down payment.
Down payments are used to secure the product or service, but also to mitigate the risk involved in a sale.
Deposit vs. down payment
The terms ‘down payment’ and ‘deposit’ are often used interchangeably. Both terms refer to the same process of providing an upfront payment as a percentage of a total sale. The main difference is that the term ‘deposit’ is more commonly used in the UK.
When down payments are used
As mentioned above, down payments are often used in the event of a large purchase. Property, vehicles, or other large assets such as machinery, often require a down payment. The down payment is typically a percentage of the total price. For example, the down payment for a mortgage might be 5%.
A down payment is usually required to be ‘out-of-pocket’ meaning it’s cash that is at the buyer’s disposal and does not require any borrowing.
While a down payment might seem to only benefit the seller (in that they receive an advance percentage of cash), they are also positive for the buyer in that they go towards the total amount owed, can help to reduce monthly payments, and ensure the buyer’s claim to the sale.
In business, a down payment might be required for a sale involving products/services that are particularly labour-intensive or are delivered in parts. In other words, if the fulfilment of the order means a lot of work for the seller, they may request a down payment to ensure that the buyer is serious about the purchase.
What happens when you make a down payment
A down payment is commonly paid by a buyer to a seller in order to secure a sale. It’s not uncommon that, in the event that the buyer is unable or unwilling to finalise the order, the down payment is not refundable. If the buyer cancels for any reason, the down payment might not be returned. The conditions of the down payment should be clearly stated in the invoice payment terms.
If you continue with the sale and pay the full amount, the down payment is usually subtracted from the total amount owed, meaning that it contributes to the full payment for the sale.
Example of a down payment
Ronald owns a carpentry business. He regularly makes custom furniture for customers. He is known for the high quality of materials used and his attention to detail. Because each piece is created to order, Ron requires that customers make a down payment before he begins work on a new item of furniture.
Cindy orders a custom dining table to suit her new cottage. She provides measurements of the room and visits his workshop to select the wood. She chooses a walnut, with a farmhouse aesthetic. Ron provides a quote and states that he requires a 20% non-refundable down payment.
Ron estimates that the total for the labour and the table will be £1,200, so the down payment required in order for him to start work on the table is £240. He sends Cindy an invoice for this amount. He invoices for the remaining amount after the table is completed.