Prepayment

Prepayment: a payment the buyer makes before the seller ships the goods or provides the service. In international trade, it is the most common form of settlement with a new supplier. The supplier gets money for production and confidence in the buyer. The buyer takes on the risk: the money has already gone, and the goods are not there yet.

Types of prepayment

• Full. The whole amount before shipment. Found in small and non-standard orders.
• Partial (advance). Part of the amount before production, the balance once the goods are ready or against the shipping documents. More in the entry on partial payment.
• By schedule. For long contracts and deliveries in batches: each payment is tied to a stage.

What currency control requires

An importer who has paid in advance must ensure one of two things: the goods have been imported, or the money for goods not delivered has come back. The deadline is set by the contract, and the bank checks it against the delivery documents. If the delivery falls through, it is the importer, not the supplier, who answers to the bank. That is why the delivery date in the contract is set realistically, with a margin. More in the entry on currency repatriation.

How to reduce the risk

• Check the supplier before the first payment: registration, track record, feedback from partners.
• Split the amount: a smaller advance, the balance on shipment.
• For a large deal, consider a letter of credit or escrow.
• State in the contract how and within what period the supplier returns the advance.

A prepayment abroad can be made through an agent in the same way as any invoice payment. Our model has no deferred payment and no advance at the agent’s expense. The payment goes out after the agent, the rate and the fee have been fixed. On request, the roubles wait in a special escrow account at a Russian bank until the agent sends the currency to the supplier: this scheme carries an additional fee. What this looks like in practice is described on the Invoice payments page.