Deposits and Your B2B Business: Should You Require Partial Payment Up Front?
You spend months working on a big project for a client. You make the requested changes without delay and answer every question, even when it comes after hours. Yet after sending your invoice, months go by without payment and soon you realize you’ll have to get help if you ever want to be paid for all of those long months of hard work.
Outside of late fees, there are few things you can do to avoid late payers. You can, however, set up protections against doing work without being paid. In addition to requiring milestone payments along the way, you can mandate an up-front deposit of as much as half, depending on how your other milestones are set up. Here are a few reasons deposits are a good idea for your next big project.
Whether you’re working with a new client or an existing one, taking on a big project can be risky. Even long-term clients can suffer financial issues or have a change of heart along the way. If this happens between projects, businesses can recover as long as most of the client’s previous bills have been paid. Large projects require businesses to set time and resources aside for weeks or months at a time. A deposit forces the client requesting that commitment to make a commitment as well, which means both parties will be invested in the outcome.
Funds for Resources
During the time that the work will be performed, a business will need to pay existing employees and possibly even contract some of the work out. Depending on the type of work, supplies and administrative tools may also be required. A deposit gives your business the money it needs to line up those resources. Without a deposit, you would be responsible for paying for those resources out of your own account, putting you at an even greater deficit.
Reputable Clients Won’t Mind
Some businesses hesitate to ask for a deposit, especially in the early days, out of fear that a potential client will find it unreasonable and go elsewhere. But by agreeing to take on a client’s project, you’re also agreeing to dedicate your efforts to that client for the foreseeable future. This may even mean turning down new work from clients who will gladly pay a deposit. If someone refuses to pay a deposit and takes the work to a competing firm, it may be a sign you would have had issues later with payment.
Recourse Is Limited
When a client doesn’t pay, there are a few things you can do, but each type of recourse comes with a financial expense to you. First there’s the productivity you’ll lose in chasing after payments, including the stress that comes along with worrying you won’t be paid at all. You can take it to small claims court and require the client pay all court fees, but you’ll still be out the time you’ll spend filing paperwork and stating your case. If you turn the client over to collections, often you’ll only get a percentage of what you’re owed, which likely won’t cover the amount of work your team has put into the project. By requesting a deposit before you’ve been burned by a few bad clients, you’ll be able to avoid losing money.
Waiting until a large project is complete puts your business at risk of investing months of work for a client without being paid. In the end, this could put your entire business in jeopardy. A deposit also protects your business against paying subcontractors and purchasing resources out of your own accounts, which will put you further in debt if your client doesn’t pay.