What is a reasonable price to ask for a down payment?
I own an art gallery. Often clients want to hold a piece of art for a work function or want to store it at the gallery until they are ready to move it. Currently I charge a 10% down payment or security deposit of the piece. Is this an acceptable common rate? How do I account for any down payments? Is it considered income at the time of payment or when the sale is finalized?
Dear Zoe, releav of 90% payment then asking for 10% to pay is meaning less. It must be optional. Depends upon the ability to pay by the customer.
But, im we put it on instalments then authenticate documentations are highly desirable, thanks
10% is a fine rate for a non-refundable deposit but as Bob asks why cant they pay in full on a credit card. I think when you get comfortable asking for payment in full then your clients will get comfortable paying in full. If they ask why not tell them your accounting system doesn't let you do anything else and shrug.
I say the down payment is not income, if it is you need to collect sales tax on it.
Also, get some clear definition on when you hold clients art (you collected payment so it is theirs). Confirm with your P&C insurance agent what coverage on damage and theft those pieces have (that's why someone said to charge for storage) and then have a written storage agreement to support the situation. By the way, does this happen often?
There are two ways to look at this query - and thus there are two answers in my opinion.
1. If you have "sold" the art work and the customer wants you to "Store it in the gallery till it is moved" it is only fair that you collect a 100% of the value of the art work. This is because it ensures a) you get your money, b) they can't change their minds aka buyers remorse. Also, remember you are taking on an additional responsibility by securing the art work till they have been transferred - hence you are allowed to actually charge them a fee for safe storage of the said art work.
2. If a customer is very keen to buy the art work but wants to come back at a later date and buy it - but wants you to "hold onto it" till then, charging 10% is acceptable, but also make it very clear that the deal is time bound - say 1 week- 4 weeks depending on the interest expressed in the piece. This ensures you do not loose business incase the original buyer backs out and someone else is not allowed to buy the piece as it is placed on hold.
Regarding accounting for the money
in scenario 1 : it will be an income. The additional fees received from storage of the art will also be booked as an income.
in scenario 2 : it will be considered as an advance and will be a liability. Once the deal is closed and the remaining amount is paid, the advance will be moved to income and if the deal falls through the reimbursement is booked as a settlement of an account.
Please note: This is not as per US GAAP as I am NOT a certified CA.
Hi Zoe Brown,
I am not a lawyer or an accountant so please keep this in mind. Also I am only making a suggestion. 10% seems too low to me. If you have established relationships maybe 20% is better. If your system works currently why muddy the waters with 50% or 100%. You have good customers. 20% seems more reasonable. The other thing is that people bring up down payments or security deposits. It looks like a security deposit. Do you keep the deposit if they do not follow through with the sale? If most sales are completed then I would consider it income when they give you money at the time they give you money. If it is a security deposit then what are you liable for? If you are liable (where you can be sued if you do not eventually sell the piece to them) I would not consider it income at the time of the down payment. This all does depend on your contracts. If it is truly a security deposit then you would keep it in an account separate from your other monies (or at least having the balance available always). This is a way to show (ask an accountant how to "prove" it) the IRS it is not truly income until the sale closes.
Another suggestion would be to go to conventions or other places that gallery owners are in the masses. You could ask them what their current practices are. This would probably be the best advice. There is a LA Art Show at the Los Angeles Convention Center in January 2017. I am not telling you to go there but going to events like this would give you many ideas. You can always be a visitor. Conventions are great for making money for exhibitors.
The best of luck to you!
As a professional buyer, I might suggest that you look at the UCC for the legal aspects of buying and selling goods. Here's a website link. http://www.fullertonlaw.com/uniform-commercial-code The Time for Payment section would apply to your question. The default is payment at the time and place of delivery unless the parties have agreed otherwise. Any agreements to pay in advance of delivery or to extend credit terms should be agreed to in advance, preferably in writing.
You should probably tailor your policy based on the credit worthiness of the buyer. Your may extend net 30 payment terms to an established business that you work with often, but require 100% payment in advance from a walk-in individual buyer. Charging a fee for deliveries delayed to the point where it is a burden to you (1 day, 1 week, 1 month, 1 year) is perfectly reasonable and you can base that on the burden, size and value of the piece. The higher the fee, the less art you will have to hold.
Thank you everyone for sharing your advice and taking the time to respond. It seems unanimous that a 10% down payment is too low, and asking for full payment at the time of sale might be more suitable.
I do not know art industry. But what makes sense to me -- Charge the entire price. They are buying it. What if you only take 10% and miss out on a REAL sale while you wait & it takes up your space. At best, charge 50% on day of sale with legal authorization to charge their credit or debit card the final 50% in 30 days or less. You can even post your storage charges. Then decide to be nice and "forgive" storage for the first 30 days. All in writing. Okay?
Income is recognized by how your accounting is set up. If you are cash accounting, cash in is typically considered income. There are always changes to rules within the accounting chart of accounts, so this is not cut and dry. In accrual accounting, the income isn't recognized until the total sale is consummated, meaning the deposit or down payment is held in an accounting line specifically geared to track. I'm no accountant, so I won't give you advice on how to recognize the cash, so ask the one handling your books;
As for the downstroke, I always ask for 50%, but that's me.
Down payments are generally a representation of the value of the work or product that carries to the purchaser at the time of the contract. So in something that requires construction, then its reasonable for down payments to be a 5-10% level and then progress payments being made - and you can mark these as income provided the contract of sale describes this correctly. IF you have a downpayment and there is high risk that the payment canc be cancelled or there is no 'change of title' then that will sit in your books as a debt as you may have to pay it back.
In the case that you describe I would request full payment for this. You can always provide an extension to any legislated cooling off period if you desire but if 'holding' the artwork means you cannot sell it to someone else then the entire value of the piece has been handed over to the client. You could also ask for a storage fee. This always depends upon your market. If you are selling then people are buying.
Definitely make them pay it all up-front. If they cannot or are not willing to do that, they cannot afford the artwork anyway.
Zoe, a great question.
First of all what is your business.
My bet it is to make money. The second bet is to sell art.
Transfer of property is only when the item is sold in full.
Then the title transfers.
So until it's sold and fully paid for it's yours and not theirs.
If a customer asks you to store or hold a piece of art. they can only do that it they own it.
In fact you should be charging them for storage and security. what would happen if for any reason the piece was stolen or damaged in some way.
By all means help them out by holding and or storing the item for free, but at the same time they should be helping you out to continue your business by paying in full.
If all your art was "sold" with a 10% payment, and they all asked you to hold it for 3 months while they moved house, how would you pay your bills?
It's a hard reality, like they say, a sale is not a sale until it's paid for, and you have completed the transaction by the receiving of funds for the goods.
the other part of your question.
You are not in the "loaning business" If clients want to take a piece of work for a function, that's great. But you should really rent it out.
This requires a completely different set of terms and conditions.
you should get a lawyer to draft up a suitable rental forms.
set it us as a separate part of your business.
There would be certain conditions, securities, and return aspects relating to the pieces.
While at the same time if you are paying the artists on commission of sale, you should also be paying them a commission relating to the hire of their work.
If your clients are taking it away from your security then they have to be covered for any and all damage / restoration that may be required.
That can be covered via insurance, much the way car rentals do.
Otherwise they can always pay for it then it's theirs and that if fair.
Hope this helps.
Down payment and security deposit are two different things. Down payment is for work to be done for client. Since, your work is ready to be delivered your must ask for full payment, If customer don't want to pick-up art work, you can ask for safe custody charges, as you will be responsible for safe keeping of work and it actually costs.
U need a better understanding of our costs.....then negotiate from strength
This a bit of an open question since it depends on the natures of the contract you are entering. As an example their may be issues relating to raw materials that specialist and would be "one-off" purchases for the contract. To that end I would ask the purchaser to pay for the raw materials up front, together with 10% of the contract price.
From either side of the table; whether it be vendor or purchaser I think 10% in a straight contract of supply and purchase would not be unreasonable, particularly if there is a demand for that item/commodity/skill. You don not want time wasters; come to that people who are not financially capable making the price required.
I can't comment on whether 10% down is reasonable for your gallery, but if you are collecting a "down payment", meaning the customer intends to complete the purchase, then that is considered income to you. But if it is a "security deposit" that you may end up refunding later or could later be applied toward the purchase price, then it would be a liability and not recognized as income. If you were audited by the IRS, they would look at the paperwork associated with the sale of the artwork and determine whether they think it is really a down payment or a security deposit, so be sure to choose your words carefully when you issue a receipt for the money your clients give you.
Way too low. Why not have them pay in full? What's the logic to letting them pay just a down payment? You are not Walmart doing a layaway. You are a professional art gallery! If it were me, I'd ask for 100% and if they balk ask why. The only reason they'd balk is if they don't intend to actually buy it.
Also, if you absolutely have to take a partial payment, then you need an agreement that they will pick it up within a certain time-frame or they lose their deposit. Otherwise, you might end up holding onto a piece that they never intend to buy and you can't resell it.
You might also think of asking for a storage fee. It costs you money to store it or hang it that you could be using for other things that will generate income.
Most small businesses are on a cash basis for accounting which is pretty simple. So, if you do take a partial payment, say half come in on Dec 31, 2016 then that's 2016 revenue and if the other half comes in on Jan 1, 2017 then that's 2017 revenue.
Unless you have a sales contract with this 10% as down payment, this would be considered a security deposit and not an income. Is this deposit refundable at a later date? If so, it is a liability. Otherwise it may be considered income when the arrangement finishes.
Regarding 10%, it depends on your relationship with customers because I assume these art pieces are valuable. Hoping you have a legally binding agreement when you loan these items for a potential sale.
Hope this is helpful.