Deposit is defined by Merriam-Webster’s Dictionary as:
- to place especially for safekeeping or as a pledge;
- to put in a bank
Sounds very safe doesn’t it? That’s because most of us hearing the word deposit automatically think Bank. The safety is driven by the entity on the receiving end of that deposit. The same needs to be true of deposits paid to a supplier to help induce them to sell or produce a product. Let’s call these Business Deposits.
Business Deposits involve a Buyer, the entity paying the deposit, and a Seller, the entity providing the goods. There are a number of considerations that go into the decision to pay a deposit:
- In paying a deposit the Buyer demonstrates commitment to the product. At the same time, the Buyer becomes an unsecured creditor of the Seller. The only way to realize the value of the deposit is to take delivery on the product.
- The Seller benefits from the deposit by having an infusion of cash. The cash is intended to go for your project. However, there is the risk that as cash the deposit might go to other needs of the Seller.
Understanding these risks there are some steps that can be undertaken to protect all parties:
- Look at the credit of the Seller. The Buyer is essentially making an unsecured loan and as such wants some assurance of the credit rating of the Seller. There are services available that provide such information.
- Look at the history of the Seller in delivering the product you are buying. Have they done this before?
- Document carefully how the transaction will take place including what happens to the deposit in case the product is not delivered or accepted. Agree on what words like acceptable mean. Provide resolution mechanisms upfront to the greatest extent possible. Not all transactions are successful. One of the primary functions of documentation is to protect parties when problems arise.
When looking for solutions to your financial problems please remember Premier Trade Solutions, Inc. We are here to help you.