How to Invoice With a Deposit
Requesting a deposit as an upfront payment is common practice in several industries. Not only does it help a business secure a job, but it also helps increase their cash flow.
Deposits are usually a percentage of the total amount due that’s paid to the business prior to them starting the work. They are often requested for large jobs that could take several days or months to complete, or jobs that require extra materials that cannot easily be resold.
Deposits provide the business with some level of security that the client is financially invested from the start, so there's less of a chance of them backing out of the sale.
This article covers the advantages of requesting deposits, when you should request a deposit, and how to add them to your invoices. We’ve also provided some example invoices with deposits.
Collecting a deposit for a job can improve your cash flow. This means that the deposit can cover your business expenses incurred while completing the job. For longer projects, they also provide you with income before the final payment is made.
A deposit can either be refundable or non-refundable depending on your payment terms. If your deposit is non-refundable, your business will not lose money if the client backs out of the sale. It also proves that the customer is serious about the job and has at least a portion of the total, therefore they’re more likely to pay the remainder.
Deposits are common practice for sales of large amounts or jobs that take a long time to complete. They’re commonly used in real estate, vehicle rentals, and freelancing projects.
It’s up to each individual business to determine if they’d like to request deposits for their sales. If a sale is particularly risky, and there’s a chance that the customer won’t be able to pay up, the seller will feel more comfortable if a deposit is made.
If the sale is for a large amount or requires the business to purchase extra materials, a deposit can help limit the financial risk involved.
Therefore, a deposit can act as a form of collateral for the total amount due, decrease the financial risk, and also provide some security that the sale will go ahead without the buyer backing out.
If your business decides to request a deposit from a customer, you’ll need to record this on your invoices correctly. You’ll need to issue an initial invoice that only includes the deposit, as well as an invoice with the remaining balance due.
It’s extremely important to have clear terms and conditions stated on your invoice, specifically whether your deposit is refundable or non-refundable.
The first step is to create the initial invoice just for the deposit. Any time you’re requesting money from another business, including a deposit, you should issue an invoice.
Your initial deposit invoice should include all of the mandatory invoice fields, including your business and customer’s information, an invoice number, the issue date and due date, and a breakdown of the sale costs.
Because you’re just requesting a deposit with this invoice, you won’t need to include the full cost of the job. You’ll only need to include the deposit amount as seen in the invoice example below:
Once the customer has paid the deposit, you’ll start the work. When the work has been completed and it’s now time for the customer to pay the remaining balance, you’ll issue a second invoice.
This invoice will include all of the details of the products or services provided, but it’ll also need to account for the money that has already been paid. The deposit will be added as an item line to this invoice with a negative amount so that it’s subtracted from the total amount due.
Here’s an example of an invoice showing the deposit that was already paid, and the remaining balance due:
In this example, the customer had paid a 10% deposit of $100, which was shown on the first invoice. When the final payment was due, the second invoice was issued for the remaining balance. This invoice included an item line for the deposit of -$100, which was subtracted from the total.
If your business needs to apply sales tax to your invoices, your deposit invoices will also need to include sales tax as normal.
If the deposit is refundable and returned in full to the customer, then you don’t need to report the tax to the authorities because no tax was actually collected. However, if the deposit is non-refundable and the client backs out of the sale, you’ll still need to report any tax collected from the deposit to the tax authorities.