Staged payments

From CEOpedia | Management online

Staged payments are extending the payment period by spreading it into smaller parts. Staged payments can be made in two ways[1]:

  • in the first case, we use an installment paid regularly at a specified time,
  • in the second case, the payment is made in parts, after the completion of the subsequent stages of the work included in the contract.

If work stages have been defined and calculated in the contract between the client and the contractor, they can be treated as separate transactions. The division of payments into stages provides security for both parties. The contractor is certain that after completion of the work he will not be left without money. On the other hand, the customer can spread the costs over a longer period, thus maintaining financial liquidity.

Application of stage payments

Staged payments are often used when buying shares. The seller may accept payments for sold shares even for several years. Usually, the extension of the repayment period requires you to pay interest. This means that the buyer buys shares at a fixed price. He is obliged to pay part of the price when buying and paying the rest of the liability over time. The rules for repayment of the liability are included in the bill of exchange. It includes the amount of interest and the due date. The seller may receive a repayment guarantee. If the buyer fails to meet the terms, the seller may demand a return of the shares in whole or in part[2].

Staged payments are often used in biotechnology and pharmaceutical projects. It allows the investor to maintain financial liquidity and to have greater control over the course and direction of research. As in the case of purchase of shares, money can be paid in installments under a contract within a specified period or subsequent tranches can be paid at subsequent stages of the study. If the general partner dies or wants to leave, payment may not be necessary. The company may go into liquidation, while the interest will be transferred to a special limited partner[3].

Staged payments in tax

Companies have the right to deduct input tax on purchases and are required to include sales tax.When a company sells its assets, but the receipt of the consideration is deferred, the law allows for the seller to defer the recognition of tax gain along with it. The basic installment method requires that a gross profit percentage be determined for the asset being sold, using the total sale price less the seller's basis in the assets sold. Them, as payments are received, the payments are multiplied by the gross profit percentage to arrive at the recognized gain for that year[4]

Examples of Staged payments

  • Layaway: Layaway is a payment plan where customers can reserve items such as furniture or electronics by making a down payment and then paying off the balance over several payments.
  • Subscription payments: Customers can subscribe to services, such as streaming services, and pay on a monthly basis rather than one large payment upfront.
  • Pay-over-time: Pay-over-time plans allow customers to purchase items such as jewelry, furniture, or vacations and spread out payments in installments over a period of time.
  • Installment loans: Installment loans are a type of loan where the customer can borrow a certain amount of money and then pay it back over a fixed period of time in regular installments.
  • Credit cards: Credit cards are a form of payment where customers can pay for purchases in full or over time if they have an existing balance.

Advantages of Staged payments

Staged payments can be beneficial for both buyers and sellers. The advantages of staged payments include:

  • Lower upfront costs: Staged payments allow buyers to spread the cost of an item over a period of time, making it easier to manage their budget.
  • Reduced risk: By breaking up payments, buyers are not taking on too much risk of losing a large amount of money at once.
  • Flexible payment plans: Staged payments can be tailored to the individual needs of the buyer, allowing them to make payments based on their own financial situation.
  • Improved cash flow: By spreading payments out, both buyers and sellers can better manage their cash flow and manage their finances more efficiently.
  • Improved customer relations: Staged payments can help build trust between buyers and sellers, as it encourages a more transparent relationship.

Limitations of Staged payments

Staged payments can be beneficial in some situations, allowing customers to pay for a product or service in smaller, more manageable installments. However, there are a few limitations to the use of staged payments. These include:

  • Higher administrative costs: As staged payments involve multiple transactions, they require more paperwork, resulting in higher administrative costs.
  • Difficulty in tracking payments: It may be difficult to track payments when they are divided into stages, resulting in missed payments or late fees.
  • Risk of defaulting: Customers may default on their payments when they are spread out over a longer period of time, leaving the business to cover the cost of the purchase.
  • Reduced cash flow: Payments may be spread out over a longer period of time, resulting in reduced cash flow for the business.

Other approaches related to Staged payments

Staged payments can also be achieved through other approaches, such as:

  • Automated payments: Automated payments allow for an automated payment schedule to be set up for a business, with the ability to adjust the schedule as needed.
  • Deferred payments: Deferred payments are payments that are delayed for a certain period of time, allowing businesses to spread out payments over a longer period of time.
  • Installment payments: Installment payments allow businesses to pay a certain amount of money each month, allowing them to spread out payments over a longer period of time.
  • Payment plans: Payment plans are structured payment agreements that are set up between two parties, allowing businesses to spread out payments over a longer period of time.

In summary, there are several approaches to staged payments, such as automated payments, deferred payments, installment payments, and payment plans. Each of these approaches allows businesses to spread out payments over a longer period of time, helping them to manage their cash flow better.

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  1. Graham N. (2014)
  2. Bollefer S. (ed.)(2009)
  3. Bartlett J. (1995)
  4. Marks K. (ed.)(2012)

Author: Izabela Szmalec