Advance Payment or Credit Terms: Pricing the Decision
Priya Sharma
· Corporate Legal & Compliance Counsel· 3 min read
Offering thirty days of credit is a financing decision dressed as a commercial one. If your working capital costs twelve per cent a year, thirty days of credit on an invoice costs you roughly one per cent of its value before anyone is late.
- ✓Credit terms are a loan to your customer at your cost of capital.
- ✓An early payment discount has an annualised cost that is usually far higher than it looks.
- ✓Advances for services attract GST on receipt; advances for goods do not.
- ✓Mixed structures — part advance, part credit — often price better than either extreme.
Price the credit you extend
Cost of credit equals invoice value multiplied by your annual cost of capital multiplied by days outstanding divided by three hundred and sixty-five. On a five lakh rupee invoice at twelve per cent for forty-five days, that is about seven thousand four hundred rupees.
That number belongs in your pricing. Businesses that quote the same price for cash and for ninety-day credit are discounting without realising it.
Early payment discounts are expensive
A common term is two per cent discount for payment within ten days, otherwise net thirty. The customer saves two per cent for paying twenty days early, which annualises to roughly thirty-six per cent.
If you can borrow at fifteen per cent, that discount is a bad trade. If you cannot borrow at all, it may still be the cheapest liquidity available. Calculate it rather than offering it by convention.
The GST difference
Advances for services attract GST in the month of receipt, with a receipt voucher issued under Section 31(3)(d). Advances for goods do not, since Notification 66/2017 — the liability arises on the invoice.
A services business taking large advances is therefore funding GST ahead of delivery, which needs to be in the cash flow plan. A goods business is not.
Structures that work
- Part advance against materials, balance on delivery: protects your outlay without demanding full prepayment.
- Milestone billing: converts one long receivable into several short ones and surfaces disputes early.
- Advance for new customers, credit after a payment history: makes credit something earned rather than assumed.
- Credit limits per customer, enforced: concentration risk is what turns a late payment into a crisis.
Frequently asked questions
### Should I ask new customers for advance payment?
For the first few orders, usually yes. Credit is a privilege extended on evidence, and a new customer has none. Converting to credit terms after a demonstrated payment history gives them something to protect.
### Do I pay GST on an advance?
For services, yes, in the month of receipt, with a receipt voucher issued. For goods, no — Notification 66/2017 removed the requirement, and the liability arises when the invoice is issued.
### How do I decide a customer's credit limit?
Start from what you can afford to lose rather than what they ask for. A practical anchor is a fixed proportion of your monthly turnover for any single customer, adjusted for their payment history and sector risk, and reviewed rather than set once.
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Frequently Asked Questions
Should I ask new customers for advance payment?
For the first few orders, usually yes. Credit is a privilege extended on evidence, and a new customer has none. Converting to credit terms after a demonstrated payment history gives them something to protect.
Do I pay GST on an advance?
For services, yes, in the month of receipt, with a receipt voucher issued. For goods, no — Notification 66/2017 removed the requirement, and the liability arises when the invoice is issued.
How do I decide a customer's credit limit?
Start from what you can afford to lose rather than what they ask for. A practical anchor is a fixed proportion of your monthly turnover for any single customer, adjusted for their payment history and sector risk, and reviewed rather than set once.
Priya Sharma
Corporate Legal & Compliance CounselSpecializing in commercial contract litigation, Section 138 NI Act recovery, commercial property leases, and MSMED Act compliance.