Deposit Required? When to Ask Customers to Pay Upfront

Business.com / Finances / Last Modified: October 27, 2017
Photo credit: MIND AND I/Shutterstock

By firmly and confidently asking for an upfront deposit, you can show all of your clients that you quite literally mean business.

When you work as an employee for another company, there are certain things you don't have to worry about. A responsibility like collecting payment from clients is something that the accounting department handles. Sure, you may have to write up invoices, but you aren't the one chasing down the payment. In most cases, you get paid regardless of when the client processes the invoice.

When you're a small business owner, this no longer holds true. Not only are you the one providing the service, but you also have to invoice and collect money in order to get paid. If you haven't had to deal with this unique challenge in the past, then you've probably found it difficult, frustrating and maybe even a little uncomfortable.

One common solution a lot of freelancers and business owners use to ensure they get paid in full and on time is to require an upfront deposit from customers. Should you do the same? If so, when is a deposit required? How much should you ask for? In this article, we'll investigate the answers to these questions and more.

When should you require a deposit?

If you think about it, most businesses require payment before you can enjoy their products or services. At a fast food restaurant, you pay at the first drive-thru window and get your food at the second. At the movie theater, you buy your ticket and then take your seat. When you shop at the supermarket, you aren't allowed to leave with your chosen products until after you pay the cashier. Order something on Amazon and your account gets charged prior to the order being shipped.

Editor's Note: Looking for accounting software? We can help you choose the one that's right for you. Use the questionnaire below to have our sister site, BuyerZone, provide you with information from a variety of vendors for free:

 

 

In most of the previously mentioned situations, there's a physical good changing hands. But things get slightly more complicated when a service or intangible product is involved. Plenty of businesses don't require a deposit. For example, you don't pay your landscaper before he cuts your grass and prunes your bushes. A chiropractor doesn't require payment prior to adjusting you. The mechanic at the local body shop doesn't invoice you before fixing your car.

Clearly, there are situations where a payment is required in full, prior to services being rendered, as well as times when payment isn't expected until after the fact. The question is, where do you fall on this spectrum? Should you require an upfront deposit, or perhaps even payment in full? Or is it OK to wait until after you deliver the product?

The answer to this question isn't always straightforward, though there are some principles to help you determine what's best. The No. 1 thing to consider is recourse.

When you think about all of the businesses and service providers that don't require upfront payment, you'll realize that most of them have a decent amount of recourse. Take the landscaper as an example. They're physically on your property and can refuse to leave until they're paid. They also know where you live and can return over and over until you pay. Then there's the chiropractor, who has your information and plenty of paperwork to back up their payment claims. The mechanic actually has your car in their possession, so if you don't pay, they're not giving it back, and your car is worth more than the services performed.

But the problem with being a freelancer or small business owner, when an intangible good is involved, is that you don't always have recourse. For example, let's say that you own a design business and your main source of income is creating logos for clients. What happens if, after you deliver the logos to your client, they refuse to pay? Sure, you could keep the files and refuse to remove the watermark from the proof you sent, but you've already put in hours of work. Taking the client to court would cost you more than it's worth. You're simply out of luck.

At the end of the day, it all comes back to recourse. When considering whether or not you need to ask for payment upfront, think about the amount of recourse you have and whether that alone is enough to keep clients honest. If the answer is no, then an upfront deposit – or even payment in full – is a smart idea.

3 tips for collecting payment upfront

If you've never done it before, asking for payment upfront might feel strange. Here are three helpful tips to assist you in getting favorable results.

1. Prove yourself.

The last thing a client wants is to get duped out of their money. If you have a rinky-dink website, no internet presence and lots of negative reviews, it's highly unlikely that they're going to pay upfront. The best thing you can do is produce testimonials and case studies, collect referrals, and bolster your web presence so that you have a brand people can trust.

2. Reinforce payments.

People respond to positive and negative reinforcement. Understanding this, you may benefit from offering a slight discount for early payment, or charging a penalty for late payment.

3. Get on the phone.

In today's business world, it's not uncommon for the entirety of a relationship to take place over email. While email is often convenient, picking up the phone or meeting with a client in person can be very beneficial. It establishes trust and makes a customer feel at ease.

Be confident in yourself

As a freelancer or business owner, confidence is something you can't put a price on. When you work for yourself, you're often the only one who believes in your cause. And whether you’re trying to secure a contract or collect a payment, confidence speaks louder than anything else.

There's no room for timidity when it comes to collecting payment. If a client senses even the slightest trace of weakness, they know that they have the upper hand and will exploit you whenever they can. By firmly and confidently asking for an upfront deposit, you can show all of your clients that you quite literally mean business.

 

Login to Business.com

Login with Your Account
Forgot Password?
New to Business.com? Join for Free

Join Business.com

Sign Up with Your Social Account
Create an Account
Sign In

Use of this website constitutes acceptance of the Terms of Use, Community Guidelines, and Privacy Policy.

Reset Your Password

Enter your email address and we'll send you an email with a link to reset your password.

Cancel