What is a Down Payment Invoice & How to Generate It?
August 01, 2023
When a seller issues a down payment invoice and the customer obliges by sending the requested payment, a legally binding agreement between the two parties ensues.
Advanced payments guarantee that a customer commits to seeing their purchase through. It is a smart and efficient way to maintain financial control in every transaction, especially if the trade involves an expensive item or a large sum of money.
But is it always suitable for a seller to charge an upfront payment from their customers? Also, what are the steps involved in generating down payment invoices?
Keep reading if you’re curious to know the answer to these questions and learn more!
- A down payment invoice is issued by a vendor to a customer to request an advance or upfront payment before delivering the goods or services.
- Down payments act as a safety measure for sellers against potential losses in profit, non-payment, or order cancellation.
- Deposits are refundable to the customer upon completion of the contract shared with the vendor. Down payments are non-refundable but are subtracted from the final amount charged once the customer receives the items they purchased.
- Taxation on a down payment invoice will depend on the type of transaction and the goods sold by the vendor.
What is a Down Payment Invoice?
A down payment invoice is a type of invoice vendors send to secure advanced customer payments. It is usually created for large orders or when a customer purchases items in bulk.
Down payment invoices are a form of protection or insurance for the seller in case of non-payment. Once the customer sends the amount needed for the down payment, the initial payment is deducted from the final invoice.
People often compare and contrast a down payment vs deposit. Deposits are similar to a down payment because both pertain to an advance or upfront payment.
That said, the initial percentage of the payment sent by the customer is considered a credit since the vendor requested and received payment even before they delivered the goods or services purchased from their business.
Down Payment Examples
A down payment invoice is often requested in transactions that involve purchasing a car, a house, or raw materials.
Let’s take a look at the sample scenarios below.
Purchasing a Car
Huey purchased a second-hand car worth $32,850. Since the standard upfront payment for used cars is typically 10%, Huey will be charged a down payment of $3,285. For brand-new vehicles, car dealers usually charge a minimum deposit of 20%.
Purchasing a House
In the U.S., the down payment for residential properties ranges from 3% to 20%. Let’s say a homebuyer purchases a house worth $450,000 with an initial 5.5% down payment, or $24,750.
Purchasing Raw Materials
Regarding charging initial payments for raw materials, it will depend on the material the supplier provides. For instance, Pete supplies materials such as wood, glass, and leather, which are used to manufacture living room furniture and fixtures.
A client orders materials from Pete worth $600,000, and in return, Pete sends a down payment invoice that requires the client to pay an initial 30%. In exchange, he delivers half of the total goods purchased by the client and sends the remaining half upon receiving the rest of the payment.
When Are Down Payments Used?
Down payments do not apply to all types of transactions or purchases. The following are some examples of purchases where a vendor or business may request upfront payments from their customers:
- Bulk orders. Purchasing items in bulk, such as raw materials or office supplies, requires initial payments to protect the supplier in case of a dispute or disagreement halfway through the transaction.
- Custom-made products. Products meticulously tailored to a customer’s specific preferences require time, labor, and even a special type of material to meet the buyer’s expectations. As such, the seller charges an advance deposit to acquire the materials needed to produce the requested item.
- Internationally shipped items. Some sellers do not allow cash-on-delivery (COD) payments if they ship their items internationally. This is especially true if they supply fragile goods that require extra care in delivering the items to their customers.
- Major purchase. A major purchase can be in the form of buying a commercial or residential property or a vehicle. Property owners and car dealers charge down payments to ensure the buyer fulfills their financial obligations until they have fully paid for the property.
What Information Goes on a Down Payment Invoice
The following is the key information a down payment invoice sample must have:
The invoice header bears the vendor’s name or the name and logo of their business. It is ideal to have a header for all types of invoices, as this enables the client to recognize who the invoice is from instantly. Headers also indicate a trustworthy and legitimate business.
Invoice Number and Date
The invoice number is a distinct code assigned to each invoice for easier tracking of payments and client orders. The invoice date refers to when the invoice was created and issued to the customer.
The buyer's information includes the client’s name, contact information, and address. Sellers must ensure that they input the correct buyer information to ensure they charge payments from the right customer and prevent a down payment invoice from being sent to the wrong address.
The seller's information details the vendor's name, business address, phone number, and email address. The seller may also include their business website, if they have one.
Itemized List of the Goods or Services
All information about the goods or services ordered by the customer, from the number or volume of items to the cost per unit, is enumerated in the down payment invoice.
Sometimes, the seller only needs to list the items to be delivered in exchange for the initial deposit.
This refers to the total amount charged to the customers in advance. While the vendor has the right to determine the down payment rates for their goods and services, it is best to inform customers of the need to charge an initial deposit.
How to Create a Down Payment Invoice Using Our Generator
If you are catering to several clients, using our invoice generator is a practical solution that will aid you in managing purchases and sales. Invoice generators are easy to use, convenient, and ideal for businesses and sellers handling multiple orders.
Simply follow the steps below to use our generator:
1. Open the invoice generator.
2. Input all the essential details of the transaction in your invoice.
Don’t forget to specify the details or instructions for the down payment. Add the payment terms and tax (if applicable).
See the example below for reference:
3. Preview your invoice to verify all the information. This is how your invoice should appear when you preview the document:
4. Once all the details are finalized, you can download your down payment invoice. Redo the process from Step 1 if you need to produce more invoices.
Are Down Payments Refundable?
Down payments are non-refundable. The reason is that if the client decides to complete their purchase, the initial amount they have paid to the seller is then subtracted from the final payment of the transaction.
If a customer purchases an item worth $1,000 and pays a down payment of $450, the seller deducts the down payment amount from the final invoice. That means the customer only has to pay the remaining $550 upon receiving the item.
Down payments are also charged to protect sellers and businesses if the customer does not pay the order in full or cancels their purchase before the goods are delivered.
Sellers should include the conditions for charging a down payment from their customers in their invoice payment terms. In this manner, customers are properly informed of their payment obligations in the transaction.
Down Payment Invoice & Taxation
Imposing a tax on a down payment is uncommon, although it will depend on the transaction type and goods the vendor sells.
Taxes are not applied to upfront fees for car and residential property purchases. On the other hand, taxes may be imposed on international sales.
Countries that impose taxes on international goods also vary in the rates and percentages applied to the taxes and added costs.
Down Payment Invoice vs. Deposit
A down payment invoice and a deposit are similar in that both pertain to prepayments sent to a seller or supplier. One of the main objectives of charging down payments and warranties is to provide the seller with security before the transaction is completed.
On the other hand, deposits are returned to customers upon the termination or completion of the terms of their contract with the seller. An example of this is when a landlord requires a security deposit from new tenants as a form of collateral.
Down payments are not refunded or returned to customers. Instead, the upfront amount paid to the seller is offset by the remaining balance indicated in the final invoice.
Down Payment Invoice vs. Proforma Invoice
A key difference between a down payment invoice vs a pro forma invoice is whether the customer is obligated to send a payment upon receiving the invoice.
Down payment invoices require customers to pay the initial amount indicated in the document. The payment is used to secure the seller or purchase the materials needed to prepare the goods the customer ordered.
Proforma invoices are sent to customers who have expressed full commitment to the purchase but need a few adjustments and negotiations before pushing through with the transaction.
The buyer may want to negotiate the rates or extend the terms of payment established by the seller. Otherwise, the customer may have placed an advanced order, which the seller must confirm by providing the complete purchase details on a pro forma invoice.
Pro forma invoices do not have any legal implications. It is meant to preview what the customers can expect by pushing through with the transaction.
Down payment invoices legally bind customers to trade. When customers comply with the seller’s payment demands, they accept their share of responsibility for completing the sale.
Unfulfilled payments can prove detrimental, particularly when a vendor makes a living by selling cars, houses, and commercial properties, providing bespoke goods, or supplying raw materials to other businesses.
As such, a down payment invoice is a handy tool for preventing potential losses in profit.
Conversely, sellers and business owners must consider the implications of issuing a down payment invoice, meaning that they must assess how it will affect their operations and customers in general. Remember, charging upfront payments must be suitable and reasonable for the type of goods or services sold.