When you’re an employee, you don’t have to worry about invoicing for your work. Collecting customer payments is someone else’s job and you receive a paycheck regularly to compensate you for your work.
However, small business owners don’t have this luxury. They provide the service and must invoice clients and collect payments. They often put in a significant amount of work and investment upfront, shouldering all the risk and trusting their clients will pay them.
Sometimes, small business owners experience nonpaying clients who refuse to compensate them for services rendered. They must decide whether to pursue the debt collection process, put in more work or walk away.
Many freelancers, independent contractors and small business owners require an upfront deposit to protect their interests. We’ll examine circumstances where requiring a deposit is a good idea and share best practices for collecting upfront payments.
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Many businesses require payment in full before you can enjoy their products or services:
Things get more complicated when you’re selling intangible goods and services. But even so, many service businesses don’t require upfront payments or deposits:
It’s up to you to decide if an upfront payment or deposit is appropriate for the service you provide. Here are four questions to ask when determining where you fall on the payment spectrum.
When selling an intangible good or service, use social selling tactics to showcase your offerings on social media platforms. Customers will be able to visualize and trust the efficacy of your solutions.
Whether you have collateral will affect your decision to require a deposit or upfront payment. If you hold the customer’s property as collateral, you don’t need to charge upfront for your services or ask for a deposit.
Consider the businesses and service providers that don’t require an upfront payment. Most have recourse to ensure they’re paid. For example:
Whether you have recourse when asking for payment will help determine if you should require a deposit or upfront payment. When you have recourse, you don’t need to secure payment. For example:
However, freelancers, small business owners and contractors dealing in intangible goods don’t always have recourse. For example:
If you don’t have significant leverage to demand the money the client owes you, you should consider getting paid upfront.
If you decide to charge interest or late fees on unpaid invoices, ensure the original contract spells out that you’ll assess these charges, when you’ll assess them, whether they compound and if you’re granting a grace period.
It makes sense to require a deposit or upfront payment for custom products and services.
Let’s say you have a sign shop and a customer orders a sign with its logo to help market a retail store. This sign must be unique and customized. However, custom-made orders present the following risks to your business:
In this situation, asking for payment before investing time and resources into creating the custom offering makes sense.
If you are working on a project that will take weeks or months to complete, it makes sense to get payment initially so you’re not scraping by while working on it. In this kind of job, you may want to consider charging either a monthly retainer or milestone payment’s.
If you’ve never done it before, asking for payment upfront might feel strange. Here are six helpful tips to assist you in getting favorable results.
Clients don’t want to get duped out of their money. If you have an unprofessional website, no internet presence and no good customer reviews, it’s doubtful they’ll pay upfront.
To present yourself as a trustworthy vendor and brand, produce testimonials and case studies, collect referrals and bolster your web presence to create an engaging website.
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.
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, particularly if you have an unresponsive client. It establishes trust and makes customers feel more at ease when parting with their money.
In your initial conversations, explain your payment terms to potential clients. You can also explain that this helps you cut down on paperwork so you can concentrate on the work at hand.
When clients understand payment expectations and choose to do business with you under those terms, you’ll have an easier time collecting upfront payments and deposits.
Presenting business proposals and client contracts is an excellent idea, especially when selling a service. Proposals and contracts describe the work’s scope, costs and payment terms so there’s no confusion later. Getting the client to agree to this by signing off on the contract provides you with a legal document you can use in court if necessary.
If potential clients balk at paying 100 percent upfront, ask for a 50 percent deposit. You can also arrange milestone payments triggered after completing specific deliverables to give new clients peace of mind.
However, including terms with a milestone or deposit payment structure is advisable. For example, you might increase the overall price to account for the added risk. Alternatively, you could say the deposit pays up until a specific point in the process, after which the remainder is due.
Asking for money upfront isn’t for everyone and doesn’t work in every situation. Here are some pros and cons to consider.
Pros of asking for a deposit or upfront payment include:
Cons of asking for a deposit or upfront payment include:
Larry Alton contributed to this article.