How Deposits Can Protect Your Business Against Non-Payers
You’ve put months of hard work into a big project with only a promise that you’ll be paid. The client signed a contract stating exactly how much and when payment would be forthcoming, but there’s no guarantee it will be fully honored. You can offset some of your risk by requiring payments when certain milestones are met, but that won’t remove the possibility that you’ll do a certain amount of work without being paid.
For many service providers, deposits are a great way to reduce those risks. Some businesses require as much as 50 percent of a project’s full budget up front before work even begins. Here are a few reasons such a payment can be good for your new business relationships.
Making a Commitment
When a client agrees to pay a large sum of money up front, that client demonstrates a commitment to your business. Without such an agreement, the only party taking a risk is the business providing the work. The contracting party takes no risk whatsoever. By handing over an up-front payment, clients accept a portion of the risk, allowing both businesses to start a new partnership without distractions.
Establishing Ability to Pay
Perhaps the biggest benefit of deposits is that they show right away if a new client can pay. This avoids reaching the end of a project, only to learn the client has financial troubles or, in some cases, never had funding in the first place. Even if your client runs out of money halfway through your project, having a deposit will at least ensure you get paid for part of it. If you add on required milestone payments, you’ll be able to further safeguard your business against working for months without being paid for it.
Ongoing Cash Flow
If you’ll be working on a project for a period of weeks or months, you’ll likely find that not getting paid until completion poses a problem for your business. You need to be able to pay employees and vendors while you’re working and reasonable clients should understand that. With at least half of your funds coming in when new contracts are signed, you’ll be more likely to build a monthly cash flow that includes a combination of payments from completed projects and new projects to help your business as it grows.
Avoid Indecisive Clients
Even businesses that take precautions to make sure the full scope of the work is outlined in advance can find some clients change their minds. After hours of work, a business may hold a presentation for a client and find that they want something completely different. In some cases, the client may even decide to abandon the project halfway through despite a business’s best efforts. With a deposit in place, those customers have already paid in advance. Make sure the contract outlines any terms under which the deposit is refundable. With explicitly-worded contracts, you’ll be protected if one of your former clients decides to take legal action.
If the early work you perform can be stolen and used, your client may do exactly that. The only recourse you’ll have is a lawsuit or DMCA Takedown Notice, if the content is posted online somewhere. The former will be costly and the latter will only stop the client from using your content online. If you’ve handed over your expertise in the form of a proposal or strategy, the client can easily walk away with that and put it to use without paying you. A deposit at least ensures you’re paid for part of the work you’ve done and you can stop work as soon as you realize the client has no intention of paying the rest.
Businesses that have policies in place show prospective clients that they’re professionals. Most clients will understand a service provider’s requirement that a deposit be paid in advance. There are many reasons for businesses to ask for up-front partial payment, but mostly entrepreneurs should consider the protection it provides against late payments and clients who, for one reason or another, never pay at all.