Down payment - What is a down payment?
A down payment is a specified amount of money, usually a percentage of the total price of the sale that is due from the buyer before the finalisation of the sale as a guarantee
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Down payments are advance payments made at the beginning of a sale, commonly involved in purchasing expensive goods or services that will require ongoing installments. Down payments are used to secure the products 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 up-front payment as a percentage of a total sale. The main difference is arguably that ‘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 is 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 do 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 fulfillment 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 is 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.
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 the 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% 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.
Down payment and Debitoor
Online accounting & invoicing software like Debitoor gives you the tools to provide customers with an invoice for a down payment, then to reflect the down payment in the final invoice.
With the increase in online shopping and custom products, down payments have become an important part of the sales process for some businesses. Keeping track of down payments from customers is crucial in staying on top of your business accounting.
Debitoor also makes it easy to manage the down payments that you have made to suppliers, for example, by adding expenses and recording payments.