Customer deposits

From CEOpedia | Management online

Customer deposits are familiar at the construct of funding to the projects with the commerce debt. But they are not the same. Instead of the expansion of the trade debt, projects has customer deposits as the main financing source. The example of such type of debt funding can be not big contractors, where major activity is residential building. Usually, that contractors demand a discharge before the working process. They need also final payment, when the work is over(K.R. Callahan, G.S. Stetz, L. M. Brooks 2011, p.97).

Deposits that are kept by the thrift or the bank are not the same as investments, that are kept by firms of security. Cash deposits cannot waver for a time in a value in comparison to securities. Moreover, deposits are kind of the obligations of the organization supporting that deposits. Banks have the possibility to use such customer deposits for funding their operations: borrow sources or make investments(GAO 2001, p.18).

Total amount of the lending and customer deposits can be taken for making the market's concentration calculation, instead of taking the sum of assets. This option is specifically pertinent in case of LICs. There banks do not practice in financial mediation operations completely. The connection of all credits and assets and deposits is subdued. A few banks don't trust deposits of government as a way of financing, that misrepresent the connection among whole customer deposits and liabilities(T. Poghosyan 2012, p.14).

Customer deposits in past

In the years 1990s. customer deposits system was a very significant way for funding for the private banks. Moreover, indicator of interbank liabilities was essential and not positive during that while, when the private banks were popular. It shows the influence of crisis on banking and programs of recapitalization during that time. In 1990 years private banks usually had to be limited by the inner market circumstances for enhancing their loaning. It demonstrates that banks(that were foreign-owned) operated in the similar way to the private banks, that were domestically-owned. Such banks began using resources of the parent bank great while later. But, some time later, the significance of customer deposits was reduced. Interbank liabilities enlarged with the growth of loans in banks, that were foreign-owned. Estimator of such changeability is important. It is not negative only in that case when it is used toward some banks. That banks were foreign-owned during the 2000s. That connection accepts two ways of funding(B. Aydin 2008, p.12):

  • Foreign banks have the possibility to take the loans in other banks due to the parent banks’ creditworthiness in an easy way.
  • Customer deposits - they are able to get their resources of financing through transfers from the parent bank of them(B. Aydin 2008, p.12).

Customer deposits in cash-flow

One of the easy method to make the cash flow better is to agree or demand deposits in advance or retainers of customers earlier than the real work will be done. It means that payment should be taken earlier than the process of the work will begin or before ordering the inventory. However, that customer deposits cause some kind of the book-keeping trouble. The question that appears in that situation is: in what way to make the records of the cash deposit(or check) for products or service that haven't been yet created, made or sold. There are two alternatives:

  • Easy: a sales receipt can be just recorded for the items or service. In that situation, the cash, that is appears in the business should be also counted. In that case the revenue is recognized. The deposit must be nonrefundable - the revenue has to be counted in the moment when the deposit is got(in the situation if it is a cash-basis taxpayer business) (L.S. Nelson 2014, p. 130).
  • Complicated: the deposit can be used as a discovered liability. The journal entry should be created. It should have all information about the enhance in the cash account of the company and should present the enhance of the actual liability account of customer deposits. At the moment when the sale is finished and the invoice is made, customer deposit amount is taken as a minus sum at sales invoice records(L.S. Nelson 2014, p. 130).

Global financial crisis

Increasing among customer lending was bigger in number than increasing in customer deposits. Especially in UK, Euro Area and Nordic banks by 2007(R. Babihuga, M. Spaltro 2014, p.3). Capital market output have decreased suddenly for the most of huge banks, because of customer financing gaps. The reaction of the banks on the deficiency and growth of the cost of by the gross financing in the moment of financial crisis or after it was(R. Babihuga, M. Spaltro 2014, p.3):

  • concentrating at financing of customer deposit if there is a possibility
  • leaning on reducing non-core assets
  • official funding sources(R. Babihuga, M. Spaltro 2014, p.3).

Examples of Customer deposits

  • Contractors who specialize in residential building projects often require a down payment before beginning work. In some cases, the final payment is also due once the work is completed.
  • Restaurants often require customers to pay a deposit in order to book a table for a large group. This deposit is usually refundable if the reservation is cancelled within a certain period of time.
  • Hotels often require customers to pay a deposit in order to secure a booking. This deposit is usually refundable if the reservation is cancelled within a certain period of time.
  • Car dealerships often require customers to pay a deposit in order to secure a car for purchase. This deposit is usually refundable if the purchase is cancelled within a certain period of time.
  • Event venues often require customers to pay a deposit in order to secure a date and time for an event. This deposit is usually refundable if the booking is cancelled within a certain period of time.

Advantages of Customer deposits

Customer deposits are a beneficial option for investors and contractors alike. They offer advantages such as:

  • Financial security - The customer deposits offer financial security for the contractor, as the money is collected in advance, to be used for project costs. This ensures that the contractor does not have to take out a loan to cover the costs of the project and that the customer's money is secured.
  • Low-interest rates - As customer deposits are considered to be a form of low-risk debt, they often come with low-interest rates and are a more cost-effective way of funding a project.
  • Flexibility and convenience - Customer deposits are also very flexible and convenient, as they require little paperwork and can be set up quickly, allowing the contractor to access the money they need right away.
  • Increased customer loyalty - Providing customers with a secure and convenient way to pay for their projects can also help to increase customer loyalty, as customers will be more likely to use the same contractor for future projects.

Limitations of Customer deposits

  • Customer deposits have some limitations. First, they can be used only for short-term financing, as customers may not be willing to provide their money for a long period of time. Second, they are not always available, as customers may not have enough money to make a deposit. Third, customer deposits are not a reliable source of financing, as customers may default on their payments. Fourth, customers may not agree to the terms of the deposits, such as interest rate or repayment schedule. Finally, customer deposits may not provide enough capital for the project, as customers may not have enough money to cover the entire cost of the project.

Other approaches related to Customer deposits

In addition to customer deposits, there are other approaches related to financing projects. These include:

  • Equity Financing - which involves the raising of capital from investors, in exchange for an ownership stake in the company.
  • Debt Financing - which entails borrowing money from lenders and repaying it over time with interest.
  • Grants - which are typically provided by government or other philanthropic organizations and do not need to be repaid.
  • Crowdfunding - which involves raising funds from a large number of people, usually online.
  • Venture Capital - which involves obtaining funds from investors who agree to provide capital in exchange for a share of the profits.

In summary, there are a variety of approaches to financing projects, of which customer deposits are just one example. Each approach has its own advantages and disadvantages, so it is important to consider all the options carefully before deciding which one is most appropriate for a given project.


Customer deposits — recommended articles
Evergreen Loan — Advance funding — Credit Facility — Interim financing — Non current liability — In-House Financing — External sources of finance — Debt extinguishment — Borrowing capacity

References

Author: Diana Fandul

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