See Also:
Payment Terms
Notes Payable
Payroll Accounting
PEO Arrangement Compared to Outsourcing Payroll
Payback Period Method
Down Payment Definition
A down payment can be defined as an initial payment towards the financing of an expensive purchase. For individuals, this purchase is similar to a car or home. For businesses, however, this purchase could be a number of things: land, a warehouse, machinery, servers, or almost anything. Down payments are a deposit which assures to the financier that you will pay your debt. The down payment is usually larger than subsequent principal payments.
Down Payment Explanation
A down payment can be explained as a partial payment towards a purchase. They are made towards either trade credit or the financier of a purchase. It is decided on by the financier and accepted by the purchaser. A down payment is a percentage of the value of the loan.
Down payments are, in some senses, a goodwill measure. They ensure the financial stability and willingness to participate on the part of the purchaser. Though it may not seem like this, the down payment serves this purpose and is thus a staple concept when products are financed. The rationale is simple: if the purchaser is willing to pay the down payment the party is at least responsible enough to do so. The down payment mitigates some of the risk the financier takes when making an agreement with the customer.
Be weary of the no down payment business loans available on the internet. It is up to you to make sure you read all contracts fully. Financing a business is a difficult process, if someone is offering a deal that is too good to be true, chances are that it is not true at all.
Down Payment Example
Joey is going to purchase another 18 wheeler for his distribution business. He needs this tool to continue operations. Though Joey can not pay for the truck fully he can afford to finance it.
Joey has aligned a financier to help him cover the cost of the truck. The financier requires regular principal and interest payments to assure that the truck will be paid off. Additionally, the financier requires a down payment. The down payment, a somewhat substantial sum, establishes that Joey is willing to work with the party he is borrowing from.
Six months later, Joey completely pays off the truck. He does this simply and moves on to making more profits. By satisfying the needs of the lender Joey can move on to bigger and better things. Soon he will make a down payment on land in order to build a new distribution warehouse.
