What is Advance Funding?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 27 January 2020
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Advance funding is money which is paid previous to an expectation, which may be a commitment or a payment. It takes many different forms. When people make or receive such payments, it is important to investigate the terms carefully to confirm that there are no catches involved, such as early repayment penalties or unfavorable terms which may result in surrendering rights or interests in something valuable.

Some types of advance funding involve payments which are provided in expectation of future income. For example, many authors receive a cash advance when they sell their books. In exchange for the lump sum received in advance, the author does not collect royalties from the sale of the book until the estimated royalty payments from book sales equal the advance. At this point, the author has "earned out," and can start collecting royalty payments. Advances of a similar nature may be offered against patents and other pieces of intellectual property.


People can also receive advance funding in the form of an advance on a paycheck. Sometimes an employer is willing to advance an employee a loan on the understanding that the amount of the loan will be deducted from the employee's paycheck. People may also utilize payday loans to get money when they are in need of emergency funds. The payday loan has been criticized by people who argue that this form of advance funding can come with very high interest rate and may put people into debt. A viatical settlement, in which someone who is terminally ill sells a life insurance policy for cash, is another example of advance funding.

Other examples of advance funding include prepaying premiums for annuities, insurance, and similar types of contracts. This may be done by individuals or by employers who are providing benefits to their staff members, as for example in a pension plan for employees. The advance funding is used to ensure that money will be available to pay out when claims are made, and is considered a payment against a future obligation.

When negotiating for advance funding, whether it is being received or paid, the terms should be carefully evaluated. If a contract has penalties, they should be fully explained and understood before signing. People have the right to review legal agreements before they are required to sign them, and a lawyer can provide assistance with this if a contract is too complicated to easily understand.



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