What is one advantage of payment in advance?

What is one advantage of payment in advance?

• A. It prolongs the payment period.
• B. It eliminates credit risk.
• C. It typically involves lower costs.
• D. It requires less documentation.

Answer: (B)

Payment in advance has the distinct advantage of eliminating credit risk. When a customer pays for goods or services before receiving them, the seller receives guaranteed payment upfront. This means that the seller does not have to worry about potential defaults or delays that could occur if credit terms were extended. By receiving payment in advance, businesses can ensure stable cash flow and reduce the financial uncertainty associated with extending credit to customers. In scenarios where payment is received after the delivery of goods or services, outstanding invoices could result in losses if the customer fails to pay. Thus, advance payments safeguard the seller against this risk, making it a favorable arrangement in many business transactions.

Payment in advance has the distinct advantage of eliminating credit risk. When a customer pays for goods or services before receiving them, the seller receives guaranteed payment upfront. This means that the seller does not have to worry about potential defaults or delays that could occur if credit terms were extended. By receiving payment in advance, businesses can ensure stable cash flow and reduce the financial uncertainty associated with extending credit to customers.

In scenarios where payment is received after the delivery of goods or services, outstanding invoices could result in losses if the customer fails to pay. Thus, advance payments safeguard the seller against this risk, making it a favorable arrangement in many business transactions.