An advance is a type of loan or payment in which money or goods are given before consideration is received in return; usually with the expectation of repayment or adjustment in basis by the party receiving the advance.
Advance payments are generally made in two types of situations: 1) as security for the delivery of goods or services or 2) as an early payment of a bill or debt.
When an advance payment is required before the receipt of a good or service, the payment is used to cover the cost, or a portion of the cost, of producing the good or service, with any remaining balance paid upon delivery. Advance payments made as security for goods or services offer sellers protection against buyers’ nonpayment by covering all or some of a seller’s out of pocket costs for supplying the service or product. Sellers who request advance payments often provide buyers with an advance payment guarantee, in return, to assure buyers that if the seller fails to deliver the agreed-upon goods or services, the advance payment amount will be refunded to the buyer. Consumers with bad credit, or those who otherwise pose a risk of nonpayment to a seller, may be required to pay a seller in advance before they purchase goods or services. Companies whose orders are large enough to be burdensome to a producer are often required to make advance payments in order to provide sufficient consideration for the producer.
When an advance payment is accepted before a contractually agreed-upon due date, the debt or bill that is due is adjusted by the payment to reflect a lower balance.
Examples of advances include: security deposits, advance premiums, prepaid cell phone plans, and loans made in exchange for future consideration.
[Last updated in June of 2021 by the Wex Definitions Team]