Cash in Advance

Cash in advance (CIA), also called advance payment or prepayment, is a method of payment in trade under which the buyer pays the seller before the seller ships the goods, releases them, or performs the service. Payment is usually made by international wire transfer, though card payments and escrow services are also used for smaller transactions.

Cash in advance sits at one end of the spectrum of international payment terms. It gives the exporter the greatest security, since the money is received before anything leaves its control, and gives the importer the least. At the other end is open-account trade, in which the seller ships first and invoices later.

The parties agree the commercial terms, after which the seller usually issues a pro forma invoice stating the goods, price, currency and bank details. The buyer pays the full amount, or an agreed percentage, to the seller's account. Once the funds are confirmed, the seller manufactures or ships the goods and sends the shipping documents, such as the bill of lading and the final commercial invoice, directly to the buyer.

Partial prepayment is common. A contract might require 30% on order and 70% against a copy of the shipping documents or before release of the cargo. These hybrid arrangements are often recorded as supplier-payment terms in the purchase contract.

Guidance for exporters, including the US International Trade Administration's trade finance guide, typically ranks the main methods by risk to the seller:

• Cash in advance — least risk for the exporter, most for the importer.
• Letter of credit — a bank undertakes to pay against compliant documents, balancing risk at a higher cost.
• Documentary collection — banks handle the documents, but neither bank guarantees payment.
• Open account — most risk for the exporter, least for the importer.
• Consignment — the exporter is paid only after the goods are sold to the end customer.

Cash in advance requires no bank undertaking and little documentary handling, so it is cheap to operate. Its cost is commercial: buyers are often unwilling to accept it, and a seller that insists on it may lose business to competitors offering credit.

Cash in advance is common when the buyer is new or has a weak credit record, when the goods are custom-made and hard to resell, when the importing country is politically or economically unstable, and in small-value or online cross-border sales, including much e-commerce. Sellers in strong market positions, such as makers of scarce components, may also demand it.

For the buyer, the main risks are that the goods are late, defective, different from the order or never shipped, and that recovering a prepayment across borders is slow and expensive. Its working capital is also tied up from payment until the goods arrive and are sold. Buyers mitigate this by asking for an advance payment guarantee or standby letter of credit from the seller's bank, using escrow, or splitting payment into milestones.

Prepayments are also a target for fraud. In payment diversion fraud and business email compromise, criminals send fake instructions changing the seller's bank details just before an advance is paid. Verifying any change of account by a separate, known channel is a standard control.

Banks processing advance payments for imports may need to check the underlying contract as part of trade-payment compliance, because prepayment for goods that never arrive is a known channel for trade-based money laundering and for evading foreign exchange rules. Some countries with capital controls cap advance payments for imports, require proof of later import, or set a deadline by which the goods must clear customs.