What is an advance?

A business advance is when you get money before you earn it. Usually, a company pays an advance to an employee, a contractor, or a business partner. The company expects the person who gets the advance to pay it back later with the money they will earn.

How advances work

Here is how advances usually work:

The company gives you money upfront before you do the work.
You use this advance money for things you need to do the job, like buying supplies or paying bills while you work.
After you finish and get paid for the job, you pay back the advance to the company using some of what you earned.

An advance is like getting part of your paycheck early. The company “advances” you the money because it thinks you will earn it later.

Why do companies give advances?

Companies give advances for a few reasons:

To help the person getting the advance have money to start working on the job
As a sign of good faith that they want to work together
To make a deal more attractive, the person agrees to the job

Advances show that the company trusts you and wants to invest in you. They expect you to do the work well and earn the money to pay the advance back.

Types of advances

There are a few common types of advances in business:

1. Salary advance

This is when your employer pays you some of your salary before your regular payday. Reasons you might get a salary advance:

Emergency expenses come up, and you need money
You have a big purchase, and your employer agrees to help
You are going on a long trip for work and need money for travel costs

Usually, you pay back a salary advance a little at a time, with money taken out of your future paychecks.

2. Commission advance

Some salespeople earn commissions, meaning they get a percentage of their sales. A commission advance is when the company pays part of your expected commissions before you make the sales.

Commission advances help salespeople earn a steady income while they work on landing big deals, which can take a long time. The salesperson pays back the advance when their commissions come in.

3. Advance to a contractor or vendor

Companies also give advances to contractors or vendors they hire for big projects. The advance helps the contractor buy supplies and start working. Some contractors couldn’t afford to take on big jobs without an advance.

Advances to contractors often get paid back in pieces as the project reaches milestones. The final milestone is when the contractor finishes the work, and the advance is fully paid off.

4. Royalty advance

This type of advance is common in creative industries like publishing. An author might get an advance from the publishing company before publishing the book.

The author uses the advance to pay bills while writing the book. Once the book starts selling, the author doesn’t get more royalty money until the advance is paid back to the publisher. Big advances are risky for publishers but help them sign popular authors.

The benefits of advances

Advances can help both companies and the people they give advances to. Some of the main benefits are:

Steady cash flow

Getting an advance helps you have money to work with while you are doing a job. This steady cash flow is important, especially for contractors or salespeople who work on long-term projects. The advance income gets you through times when you are working hard but not getting paid yet.

Starting capital for projects

Advances also give you capital to start a project. If you are a contractor who needs to buy supplies, rent equipment, or hire workers, an advance gives you the money to do that. Without this starting capital, many big projects would never happen.

Sign of trust and commitment

Getting an advance is a sign that a company trusts you and wants to commit to working with you. This trust can make your business relationship stronger. You feel more valued and are more likely to do your best work.

Attract talent for companies.

Giving advances can help companies attract the best employees and contractors. An advance is an extra incentive that can make a company’s job offer more attractive than its competitors. People who choose who to work for might pick the company that gives them an advance.

The risks of advances

Of course, advances also have some risks to think about:

Paying back the advance

The main risk with an advance is paying it back, even if something goes wrong. What if you get an advance for a project, but then the project gets canceled? Or what if you get a commission advance but have a bad sales month?

In such cases, you might still owe the advance money back, even though you didn’t earn it. This debt can be stressful and hurt your cash flow.

Owing more than you earn

Another risk is accidentally owing more than you end up earning. Let’s say you get a $5,000 royalty advance for a book. If your book earns less than $5,000 in royalties, you won’t get any more royalty checks, even though you did all that work writing it. The advance was all you would get.

Getting stuck in an advanced cycle

You might have trouble getting off the advance cycle if you get used to advances. Every time you finish paying one advance back, you need a new one to keep your cash flow going. This cycle can make it hard to get ahead because you always owe someone.

Making advances work for you

Advances can be tricky, but they are a helpful tool when used well. Here are some tips to make advances work for you:

1. Have a payback plan

Before you take an advance, know how you will pay it back. Have a plan for how much you need to earn and how long it will take you. A good payback plan will keep you from owing more than you can handle.

2. Don’t rely on advances too much

Advances should boost your business but not be your whole income. Work on having good cash flow from your regular work so you don’t need advances.

3. Communicate with your company

Tell the company immediately if you have an advance and the work isn’t going as planned. See if you can adjust the payback plan before the debt gets too big. Good communication builds trust.

4. Use advances for growth

The best way to use an advance is to invest it in something that will help you earn more. Buy better work equipment, hire help, or take a class to improve your skills. Don’t just use advances for regular bills if you can help it. Use them to grow.