Customer prepayments, deposits and pre-orders
Ask customers to pay some or all of the price before you deliver. The cash comes in before your costs go out, so you need to borrow less, but until you deliver you owe customers the goods or their money back.
- No security
How it works
Instead of paying for materials and staff first and getting paid later, you take money from customers up front. Common forms are:
- Deposits: part of the price when the order is placed, with the rest on delivery.
- Progress payments: payments at agreed stages of a longer job, such as a build or a project.
- Pre-orders: customers pay in full for a product before you make or ship it.
- Payment in advance for a subscription or service: for example a year paid up front.
Tell customers before they pay what the money is for and when they can get it back.
Selling goods by mail, online or by phone: the Federal Trade Commission's Mail, Internet, or Telephone Order Merchandise Rule applies when a customer pays before you ship. You must have a reasonable basis for any shipping time you state. If you state none, you must be able to ship within 30 days (50 days if the customer is also applying for credit from you to pay for the order). If you cannot ship on time, you must ask the customer to agree to the delay or cancel the order and refund them in full. Refunds of cash, check, money order or third-party card payments are due within seven working days. The rule does not cover services, C.O.D. orders or seeds and growing plants.
Tax timing: the IRS generally treats an advance payment as income in the year you receive it. A business that uses an accrual method of accounting can choose to put off part of it until the next tax year, but no later.
Upsides and downsides
Upsides
- Costs nothing and gives up no ownership
- Cash arrives before your costs, so you need less other finance
- Pre-orders show real demand before you spend heavily
- Customers who have paid are more committed to the order
Downsides
- Some customers will not pay up front, or will want a discount for it
- Until you deliver, the money is owed to customers in goods or refunds
- Federal shipping and refund rules apply when you take payment before shipping goods
Risks
- If you cannot deliver, customers will want their money back, perhaps after you have spent it
- Spending deposits on other things can leave you short when the order is due
- Complaints, chargebacks and damage to your reputation if deliveries are late
What it costs
- How it is priced
- No cost, apart from any discount you give customers for paying early
- Costs that are easy to miss
- Any discount you give to persuade customers to pay first
- Income tax can be due in the year the money arrives, before you have delivered
- Card or payment fees on the money you take
Limited by what customers are willing to pay in advance and the size of your orders.
Does it fit?
Could fit when
- Your customers already pay when they order or before delivery
- You are launching a product that customers can pre-order and pay for online or in person
- You have loyal customers or supporters who would pay in advance
Unlikely to fit when
- Your customers expect to pay on invoice after delivery
- You could not refund customers if a delivery falls through
Who can use it
- Business types: Sole proprietorship, Partnership, LLC, S corporation, C corporation, Benefit corporation, Cooperative, Nonprofit
- Open to businesses with no sales yet
- Your customers must be willing to pay before delivery
- Goods sold by mail, online or by phone must ship on time, or customers must agree to the delay or get a refund
Am I ready?
What a provider is likely to ask for. Tick what you have. Your ticks stay in this browser and nothing is stored. Checklist for all own cash and no-cost
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- Clear deposit terms
- A realistic delivery plan
- Deposits tracked separately
Regulation and protections
Regulators: Federal Trade Commission (FTC).
Who runs it: Private providers, nationwide.
Not a financial product. When you sell goods by mail, online or by phone and take payment first, the FTC's rule sets your shipping and refund duties, and the FTC Act bans unfair or deceptive practices. State and local governments may add their own requirements.
Types of provider: None needed. You agree it with your customers; Online shop and payment platforms that take pre-orders.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 17, 2026.
Sources
- FTC: Business Guide to the FTC's Mail, Internet, or Telephone Order Merchandise Rule · checked October 17, 2026
- IRS Publication 538: Accounting Periods and Methods (Advance payments) · checked October 17, 2026
Something wrong or out of date?
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