Deposit Required? When to Ask Customers to Pay Upfront

What kinds of businesses do and don’t require upfront payments and deposits?

Businesses have different payment requirements, which may include payment in full before delivering a product or service, payment upon completion, or an upfront deposit before starting work or delivering a product.

Here are a few examples of businesses that require payment in full before you can enjoy their products or services:

• At a fast-food restaurant, you pay at the drive-through window before receiving your food.
• At a movie theater, you buy your ticket and then take your seat.
• When you shop at the supermarket, you can’t leave with your chosen products until you pay the cashier.
• When you order something on Amazon, your account gets charged before the order is shipped.

Things get more complicated when you’re selling intangible goods and services. However, many service businesses don’t require upfront payments or deposits, including the following: 

• A landscaper doesn’t require payment or a deposit before cutting your grass. 
• A chiropractor doesn’t require payment or a deposit before performing adjustments.
• Mechanics don’t invoice you before fixing your car (though they’ll likely provide a quote).

It makes sense for some businesses to request a deposit before performing a service or providing an item, including the following: 

• An event planner or caterer will typically require an upfront deposit to cover initial expenses and ensure a client is committed.
• Lawyers and other professional service providers often require a retainer or upfront deposit.
• Providers of custom goods will often ask for an upfront deposit to help cover initial costs.
• Rental companies often require deposits to ensure compensation in the event of damage to the rental property or item.
• Construction companies may require a deposit to cover labor and material costs. 

Your unique business, industry and circumstances will dictate whether your customers will pay upfront entirely, pay a deposit, or pay upon product delivery or service completion. 

When should you require a deposit?

It’s up to you to decide if an upfront payment or deposit is appropriate for your business. Here are five questions to ask when determining where you fall on the payment spectrum. 

1. Do you have something of value that belongs to the customer?

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:

• Mechanics: A mechanic shop has the customer’s car in its possession. If the customer doesn’t pay, they won’t get their car back, and their car is worth more than the services performed. 
• Jewelry repair: The same tenet applies to jewelry repair. If the customer doesn’t pay, they won’t get their item back. 

2. Is it easy for you to demand the money you’re owed? 

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: 

• Landscapers: A landscaper is physically on the client’s property; they can refuse to leave until they’re paid. They know where their clients live and can return until they receive payment. They can even put a lien on a client’s home for nonpayment. 
• Chiropractors: Chiropractors have their clients’ information and paperwork to back up their payment claims. They have plenty of recourse if someone refuses to pay.

However, freelancers, small business owners, and contractors dealing with intangible goods don’t always have recourse. For example: 

• Designers: Say you own a design business, and your primary income source is creating logos and brand images for clients. What happens if your client refuses to pay or asks for endless revisions? You could keep the files and refuse to remove the watermark from previously sent proofs, but you’ve already put in hours of work. Taking the client to court would cost you more than it’s worth. You’re out of luck.

If you don’t have significant leverage to demand the money the client owes you, you should consider getting paid upfront.

3. Is the product or service custom-made?

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: 

• You must put time and effort into that specific project to create the custom offering. 
• If the client refuses to pay, you can’t resell that custom piece to someone else. 

In this situation, asking for payment before investing time and resources into creating the custom offering makes sense.

4. Is this a long-term project or customer arrangement? 

If you’re working on a project that will take weeks or months to complete, it makes sense to request an initial payment 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 using milestone payments. 

Additionally, professionals with long-term customer contracts often ask for payment at the beginning of the month to cover the work they’ll complete. Kathy Gilchrist, accountant and CEO of CFOKathy.com, cites bookkeeping as a typical scenario where clients are charged before a professional completes their monthly work. “Some benefits of charging this way are that you don’t have to worry about not getting paid and dealing with collections,” Gilchrist noted. “And you know the amount of revenue you will have coming in regularly at the beginning of each month.”

5. Does your business need to pay out a significant amount of money before commencing work?

If your business must buy expensive materials before beginning work, asking for a deposit to cover these costs is appropriate. Gilchrist cited construction companies as an example of a business that should require customer deposits to cover the materials they must purchase to do the job. “Getting a deposit gives [construction companies] the cash to pay for those materials so that they don’t have to borrow and pay interest on those materials during the time it takes to complete the job,” Gilchrist explained.

Tips for collecting upfront payments

Asking for a deposit can feel awkward, but it doesn’t have to. Erik Schneider, founder of Executive Investigation and Consulting, LLC, shared the following ways to mitigate the risks of asking for a deposit and ensure everyone is on board. 

• Draft clear contracts: Outline the scope of work, deliverables, timelines and policies, including deposit amounts and due dates. This sets clear expectations and provides legal protection.
• Define refund policies: Clearly state whether deposits are refundable or nonrefundable to avoid disputes and misunderstandings.
• Communicate with your client: Keep clients informed with regular updates to ensure alignment and build trust throughout the project.

Here are six additional tips to help you get favorable results when asking for upfront payment.

1. Prove yourself before asking for an upfront payment.

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.

2. Give incentives for upfront payments and deposits.

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. You could also provide value-added benefits, such as priority service for clients who pay in advance.

3. Get on the phone to establish trust.

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 a client who ignores you. Phone conversations and in-person meetings help establish trust and make customers feel more at ease when parting with their money.

4. Set payment expectations. 

In your initial conversations, clearly explain your payment terms to potential clients, emphasizing that adhering to these terms allows you to focus on delivering the best possible work. When clients understand and agree to your payment expectations, collecting upfront payments and deposits becomes easier.

5. Put upfront payments in writing and get client sign-off. 

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.

6. Consider asking for a partial deposit.

If potential clients balk at paying 100 percent upfront, ask for a 50 percent deposit. To give new clients peace of mind, you can also arrange milestone payments triggered after completing specific deliverables. 

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.

Pros and cons of requiring a deposit

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 requiring a deposit

Pros of asking for a deposit or upfront payment include the following:

• You are guaranteed payment. 
• You receive the money you need to invest in materials without impacting your existing cash reserves.
• You can minimize cash flow problems. 
• You won’t have any costs, time or effort associated with collection activities.
• You’ll have less anxiety and stress about whether you can trust a new client.

Cons of requiring a deposit

Cons of asking for a deposit or upfront payment include the following:

• It increases the chance that a prospect will go with a competitor (unless upfront payment is standard in the industry).
• It may initially cause tension or communication issues between you and the client. 
• You might need to pay for unexpected expenses or increased time and effort associated with completing the job ― without being able to go back to the client to make up the difference.