Advance funding is any payment on a future obligation. Advance funding is usually deducted against some future obligation that the payer otherwise owes the payee. Most common examples of advance funding are: payday loans, viatical settlements, lawsuit settlement advances. Advance funding can be described in a contract, which specifies future payments in order to repay advance funding. It is usually discounted using some predetermined or based on the market interest rate. In pensions plans the term advance funding is used to describe designating money to fund future benefits.
Types of Advance funding
- Pyaday loans - a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck
- Lawsuit loans - a loan that the victim receives for compensation, which will be paid after the legal process is completed. Proceedings regarding litigation cases allow you to receive funds to cover personal injuries. The cash plots allow you to receive part of the future winnings for compensation, before the court's judgment. This is to help victims who are struggling in court for compensation for the opportunity to finance their current financial needs(Friedman, L. M. 2017, p. 16-20).
- Artists - people connected with the creation and publication of literary and artistic. Initially they receive a payment in advance, which is perceived as an advance payment for future license payments related to the sale of a work (Apke, T.M., 1998, p. 7-9)
- Payroll Services - - they are used by companies that have problems with financial liquidity and must maintain the liquidity and consistency of the payroll process. Payroll services will provide capital by offering loans based on the company's assets. Applicants must meet certain criteria and obtain agreement on the advance payment
- Advance payment - it is also used in the process of collecting funds to fund an account for future benefits, for example in the case of a retirement plan (Burton, T.B., 2005, 69).
Advance funding in Government
Advance funding also means the government's cash reserves to be used if necessary to cover commitments made after the end of the financial year for payments exceeding the agreed budget. advance funding is a way of avoiding financial problems in the event that the budget allocated for a given year is not excessive.
These are financial resources that are issued in a given financial year and in fact should be issued in the next financial year. In fact, this leads to a reduction in the budget for the next year and increased funds for the current year.
Budget amounts that have not been distributed in one calendar year can be carried over to subsequent calendar years as advance financing of the budget, in accordance with the financial regulations (Budget of U.S Government, 2014, 128, 136).
Examples of Advance funding
- Payday Loans: Payday loans are small, short-term loans that are used to cover unexpected expenses or to bridge the gap between paychecks. Typically, borrowers write a post-dated check or provide an electronic authorization for the lender to withdraw funds from their bank account on the loan's due date. The loan is typically repaid in full on the borrower’s next payday.
- Viatical Settlements: A viatical settlement is an arrangement in which a terminally ill person sells their life insurance policy to a third party in exchange for a lump sum of money. The third party is then responsible for paying the policy premiums until the insured person passes away, at which point the death benefit is paid out to the third party.
- Lawsuit Settlement Advance: A lawsuit settlement advance is a type of loan that is offered to plaintiffs in personal injury cases. The loan is designed to provide financial assistance to plaintiffs while their lawsuit is pending. The loan is typically repaid when the lawsuit is settled or the plaintiff receives a judgment in their favor.
Advantages of Advance funding
Advance funding can provide several advantages to those who use it. These advantages include:
- Quick access to cash: Advance funding can provide individuals with quick access to cash when they are in need. This can be especially helpful for those who don’t have access to traditional forms of borrowing.
- Flexibility: Advance funding can provide more flexibility than traditional forms of borrowing. This can be beneficial for people who need money quickly and don’t have the time to go through a lengthy loan application process.
- No credit check: Advance funding does not require a credit check, which can be beneficial for those with poor credit who may not be able to get a traditional loan.
- Lower interest rates: Advance funding often comes with lower interest rates than traditional loans, which can make it an attractive option for those who need money quickly.
- Risk-free: Advance funding is generally a risk-free option for those who need cash quickly. This can be beneficial for those who don’t want to take on the risk of a traditional loan.
Limitations of Advance funding
- Advance funding can be expensive. These types of loans often come with high interest rates and fees, making them difficult to pay back.
- Advance funding is only available to those who are able to prove they have some form of income or collateral. This can be a challenge for those who may not have an income or have a low credit score.
- Advance funding is often only a short-term solution, meaning that it may not be suitable for those needing longer-term financial help.
- Advance funding can lead to a cycle of debt if the loan is not paid back on time. Late payment fees and additional interest can quickly add up, making it even harder to pay back the loan.
- Advance funding can also have a negative impact on credit scores. If the loan is not paid back on time, it can lead to a lower credit score, making it harder to obtain additional loans in the future.
- Secured loans: A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.
- Debt consolidation loans: Debt consolidation involves taking out one loan to pay off multiple unsecured debts. This type of loan is beneficial because it can reduce the overall interest rate, create one easy to manage monthly payment, and help improve a person's credit score.
- Credit card balance transfer: A credit card balance transfer is when a person transfers the balance of an existing credit card to a new credit card with a lower interest rate. This can help people save money on interest and reduce the amount of money they owe.
- Crowdfunding: Crowdfunding is a way to raise funds from a large pool of people by using the internet and social media to reach potential contributors. It is often used to finance start-up companies or fund creative projects.
In summary, advance funding can come in many forms, from secured loans to crowdfunding. Each type of funding has its own advantages and disadvantages, so it is important to research each option and determine the best one for a particular situation.
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- Apke, T.M., (1998). Acquisition and Licensing of Intellectual Property. California State University.
- Budget of the U.S. Government (2014). Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2014. Budget.gov, p. 128, 136, 457.
- Brunnermeier, M. K., & Pedersen, L. H. (2008). Market liquidity and funding liquidity. The review of financial studies, 22(6), p. 2201-2238.
- Burton, T.B., McFadden, J., (2005). Employee Benefits. Chicago, p. 69-71.
- Friedman, L. M. (2017). Law, lawyers, and popular culture. In Poular Culture and Law. Routledge, nr. 98, p. 15-20.
Author: Beata Kocyłowska