Deposit payments explained
For many businesses, getting paid upfront simply makes sense. But if you’re reluctant to ask your customers for an advance payment, our guide on how deposits work may put your mind at rest, or alternatively, help you focus on a different payment process.
What is a deposit payment?
When a customer pays a deposit, they’re paying an upfront percentage of the total selling price for a product or service before they receieve it. Receiving a deposit could be regarded as a commitment to buy from your company and a point where you may wish to enter into a written contract with the customer, potentially giving yourself some extra protection in case they go running off into the sunset.
The benefits of deposits
For some businesses, taking deposits may be advantageous. Here are some of the potential benefits:
- Cash flow. Every business needs money to continue operating and if you work on long-term projects, receiving a deposit may be preferable to waiting for weeks before you can raise an invoice.
- Risk management. Non-payment following work is simply a risk that many businesses can’t afford. Once a customer has paid a deposit, you may feel reassured that they’re serious about engaging in your services.
- Managing costs. Some projects can incur significant costs, such as ordering expensive materials from suppliers. If you’re just starting out as a business, you may not yet have built up large reserves in your bank account, so asking for a deposit could provide you with some cover and help pay for materials up front.
- Client engagement. Not every business needs regular interaction with their customers, but if you’re keen for their collaboration, the money they’ve put down may make them feel more invested. In the long run, this may lead to more referrals and customer loyalty.
When should I ask for a deposit?
And which businesses should request one?
Some businesses may have a greater need to take deposit payments than others. If you run a business that sells tangible goods over the counter – like a coffee shop, food outlet or pharmacy – you may not need to request a deposit as your transactions could be processed instantly on a card machine. However, even these businesses may wish to take a deposit if they receive a big order over the phone, or a request that requires unique or expensive elements that aren’t part of your normal product inventory.
Similarly, any business whose products or services take considerable time and money – from furniture makers to wedding cake suppliers – may wish to take deposits to maintain a healthy cash flow. It may also make you feel more comfortable to ask for a deposit if you don’t interact directly with your customers. For example, a remote web designer may not have the same opportunity to ensure a payment is delivered than a decorator who works on-site in a customer’s home.
How do deposits work?
If you’re just getting your business off the ground, it’s understandable if you’re a little nervous about asking for a deposit. But there are ways to give your customers extra reassurance that their money is in safe hands; for example, you could invest in a professional website or app, with clear information about how your payment processes work. Being responsive on the telephone could help build a rapport with your customers, while testimonials and case studies may help demonstrate your reliability.
Once you’re ready to request a deposit payment, you may wish to generate an invoice and send to your customer. You could include the payment terms – for example, a 30-day deadline
– before you undertake any work- but you should always seek legal advice on these kind of payment terms to ensure they are enforceable. After the invoice has been issued, card machines like the Clover Flex could help you track your invoices and settlements.
VAT on deposits
For VAT registered businesses, if you’re requesting a deposit you should charge VAT on the invoice as you would when requesting any other payments . When you complete a VAT return, you would then include the VAT due on the deposit, and state the relevant ‘tax point’, which is the date you issue the VAT invoice or the date you receive payment (whichever comes first). You do not have to account for VAT if you refund the deposit, but you would then need to adjust your previous VAT accounting as appropriate.
For more information on VAT and deposits, visit GOV.UK.
More from Tyl
Whether you take deposits or get paid the full amount on the spot, few could argue that it’s important to have a payment system you can rely on. Discover how the Tyl
Portal can help you keep tabs on your invoices (fees and eligibility criteria apply). And if you’d like to read more articles and guides on money matters, try these for size:
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.