Your Supplier Wants an Advance: How Much Money Are You Willing to Let Go

An advance that looks like a normal condition

Foreign suppliers often ask for advance payment, especially in the first years of cooperation. It sounds like a normal condition of doing business, and often it is.

The trouble starts when the advance passes a certain limit. You are then no longer buying goods, you are financing your supplier. You find out only when the delivery date passes and the money you had already earmarked for salaries and other obligations is not in the account.

An advance with no delivery guarantee

Imagine a company that paid 40% upfront and the goods never arrive, or arrive defective. Without a guarantee it is hard to get the money back. What remains is unanswered email and customers who are waiting on you.

The second pattern is an advance that grows without justification. The first order asks for 20%, the second for 40%, the third for 60%. Such growth is rarely accidental.

What to ask for before you pay

First, tie the advance to a specific stage. You do not pay "for goods", you pay "for confirmed production" or "for shipment". That way your money is less likely to end up in the supplier's other business.

For larger advances, say over 20% of the contract value, consider a bank guarantee for the return of the advance, or an escrow account with a third party. The money is then released only once the goods are shipped.

Also negotiate that the advance falls with the years of cooperation, for example 30% in the first year, 20% in the second, 10% in the third. A supplier who refuses is telling you what the advance is for: it is a source of financing for them, not protection.

Related decision: Your supplier is late, prices keep rising, and you wonder whether it is time to leave.

When the advance and the delivery are unrelated

When a supplier will not accept any link between the advance and delivery, the question is no longer price, but whether you want to work on those terms at all.

If a supplier is asking for a large advance, describe the amount, the timing and what they offer in return. You will get a structured report on risks and options before you pay.

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