A seller may be able to negotiate that the purchase price of the goods be paid in advance. The reasons for payment in advance are obvious: the seller requires a way of funding its deliverables, or it desires a high level of certainty that it will be paid by the buyer. Conversely, in such cases, the buyer carries the risk of a possible non-conformity or non-delivery of the goods and the risk of the seller’s insolvency.
Milestones. A common alternative in international trade practice is that the parties agree on milestone payments. This is particularly common in services agreements (e.g. for product development work or for the construction of a building or infrastructure). The amount of each milestone payment may vary, as well. For example, it is appropriate to agree on:
- a prepayment of forty percent of the contract price after signing the contract, allowing the supplier to purchase raw materials or components and to pay the salaries of its employees;
- a payment of another forty percent upon delivery (or the delivery of a first batch); and
- payment of the remaining ten percent after correction of any initial defects and unconditional acceptance.
Combination of arrangements. The payment arrangements mentioned above can of course be combined with any other payment arrangement for the payment of a remaining part of the purchase price, such as documentary credit or documentary collection.