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Service businesses work on a pretty fundamental cycle: do work => get paid. That’s how it works when getting a haircut, contracting a mechanic, or hiring a painter. There are no net-30 terms, payment delays, or “could we repaint the living room in a different blue?” before payment.
So why do freelancers and business owners in professional services (legal, design, development, accounting, etc) accept this state of affairs? Try suggesting net-30 payment terms next time you get a haircut, and see what happens.
If you are one of the 27 million freelancers who struggled to get paid in 2016 — and we say this with love, having been there — it’s probably your fault. But it’s okay, because you can fix it, while also making more money and spending less time chasing down payment.
We know this because, after working with hundreds of clients, on hundreds more projects1, we no longer struggle to get paid on time. And here's the crazy thing: our clients love us even more. Turns out the "do work => get paid" cycle is better for everyone — no more chasing folks down like some kind of sheepish debt-collector, or awkward conversations around outstanding invoices.
Our approach breaks down to two parts:
- Smart payment terms
- Wtructuring client relationships with a focus on world-class client experience
In this guide we take an exhaustive look at these payment terms and the tactics we use to create great client payment experiences, in the hope that others can learn from our experience, and we can all finally get paid like any other business.
Though building the right client relationship is the most important part of getting paid on time, we need to start with payment terms because they dictate how you structure your relationships. We’ll walk through each of the terms we use and how to apply them, but if you just want the actual contract legalese, you can download the terms we use here.
Payment method on file
Do you know what makes for a painful client experience? Having to dig up and relay the same information over and over and over again during a project. You would never ask for the client’s brand guidelines or last year’s accounting records each of the dozen times you need them during the course of an engagement, so why should payment information be any different?
This term solves this problem: the client agrees that the freelancer will keep payment information on file in order to process payment for agreed work.
Most late payments are not malicious — payment is simply another item on their already-stuffed todo list, and it often gets pushed behind other priorities.
Understandably, some freelancers and business owners are reticent to keep payment methods on file, for fear of losing someone else’s highly sensitive information. The solution to this is simple: use a tool that stores this information behind bank-level security for you.
Simple: work does not start until the client makes an upfront deposit.
One of the realities of service businesses is that payment comes after work. With an upfront deposit, you mitigate how much money you would lose, if, say, your client goes out of business during the project or the marketing director you were working with gets fired and the new person cancels the project (if you freelance long enough, stuff like this will happen).
Asking a client to pay before they have seen your work can feel uncomfortable, (especially for new freelancers) but deposits are a common practice in service businesses. If a client is reluctant to pay a deposit, this may be a sign that they’ll be reluctant to pay future invoices once work is complete. It also helps solidify the relationship: work for money.
Charge authorization: charge don't invoice
This one surprises freelancers we talk to most. But really, it shouldn’t — you and your client have already agreed on the amount and timeline of the charge, whether it is for a milestone payment or the 22.5 hours you worked on their project this week. No need to to make them jump through hoops to pay you — remember, asking them to pay you is adding another item to their already-packed todo list. Even if the client intends to pay right away, they may not because your point of contact has to email to Cheryl in another department to get the company wire transfer information, which just adds another thing to her todo list, and more points of failure.
This is not to say you should just silently hit the charge button and call it good. We’ll get into this more in the client relationships section of the guide, but communication is key here: set expectations upfront, send pre-charge reminders, and post-charge receipts.
Late payment: work stops if payment is overdue
If you work with clients large enough to have their own contractor payments system, you may not be able to get payment information on file, or charge when it’s due, instead having to send traditional invoices. Compounding this problem, large organizations distribute responsibility in ways that can make getting paid on time maddening: your point-of-contact is not issuing the payment, instead deferring to someone in Accounts Payable who doesn’t really know you from Adam, and probably has more work than hours in the day.
By simply pausing all work when payment is overdue, your point-of-contact goes from “I don’t handle billing — talk to Cheryl” to making sure Cheryl puts your invoice at the top of the pile.
Due on completion
This just means that payment is due when you complete work, not when the client signs off on it — a subtle, but important distinction.
Remember that client who wants to get their friend or coworker to review your deliverable before paying? Our client does not mean any harm by this — heck, the client is showing admirable humility, recognizing they are not the expert in your field — but this all too often delays payment for weeks, and may also come with a list of out-of-scope requests from someone with no context on the project.
In an ideal world, you could get paid upfront for all work, before you lift a finger. Some freelancers and service business owners only work this way, but that might not be an option if you do not have an established business with more inbound clients than you know what to do with.
This term is designed to avoid that situation, and the 48 other flavors of it. Making payment due when work is complete sets up the engagement so that everyone understands a simple, but key distinction: payment is for your work, not the product of your work (hey it’s our old friend, the do work => get paid cycle).
Think about it this way: if you do 20 hours of work, and your client is going to request 1 hour of revisions 3 weeks later, shouldn’t you get paid for completing 95% of the work now, not after some arbitrary delay you have no control over?
A specific tactic here, is to setup a payment schedule like this one:
Deposit - 50%
Milestone 1 - 12.5%
Milestone 2 - 12.5%
Final Deliverable - 15%
Asset Transfer - 10%
You can then charge the payment method on file when you finish your work at each step, minimizing the amount of work you do before getting paid. And at the end, there is still that last 10% outstanding, so the client does not feel like the engagement is totally over.
Sometimes reviewing your deliverable is just not the top of your client’s todo list. Or maybe the project took a week longer than expected, and now your point-of-contact is going on a three week vacation. It can be hard to take on new clients in this situation, because as soon as this client resurfaces, you will have to pick their project back up.
Retainers are the perfect way to avoid these situations, and make sure your interests and your client’s interests are aligned. Automatically charging a retainer (remember, we have the card on file) will help your client move you up the todo list.
Retainers are such a common tool in service businesses that most clients won’t even blink when you mention it. If you are worried about getting a bad reaction, here’s a snippet you can use to explain your retainer:
“We require retainers to ensure that everyone’s interests are aligned. We find that sometimes during a project, our clients will want to consult with an outside party, commission additional deliverables, or simply have to prioritize a pressing item elsewhere in their business that pops up. And that’s totally okay! Unfortunately when this happens, it puts our business in a bind. We want to make sure we can be totally dedicated to your project, which we can’t do if we have to pause the project and pick up additional clients in order to pay the bills.”
Anti-Terms: net-30, net-60, or (gulp) net-90
You are not a bank, do not work on credit. Or at least, minimize how much work you do on credit.
The biggest problem with these terms is that it kills your cash flow. Let’s say you bill 30 hours a week at $100/hour, and you invoice weekly. With net-30 terms, you will have about 5 weeks of unpaid work at any given time (1 week of work + 30 days to pay for that work = about 5 weeks), which comes out to $15,000. Do you have $15,000 that you’d like to lend to clients? How much of your time do you want to spend chasing down payments?
Net-30/60/?? payment terms also amplify other problems. If there is an issue that is going to delay payment, for example, you need to know about it ASAP, not a month later after dozens of hours of additional work-for-credit. This could be anywhere from the client having cash flow problems to a misunderstanding around scope of work (“I thought this was supposed to include
The key to creating a world-class payments experience can be summed up in two words: no surprises. We take a 4-pronged approach to this: set expectations, send pre-charge reminders, always send a receipt, and bill frequently.
Set expectations before starting work
No one like surprises that hurt their bank account. So when starting a new project, do not be shy about clearly explaining how and when your client will pay for work.
Yes, you absolutely need to include payment terms in your contract/proposal, but, and I don’t mean to rock your world here, your clients probably are not reading every line of your contract. We like to think of contracts as the last line of defense — if you are referencing the contract outside of a dispute, you probably did not communicate something clearly.
At first, it can feel like clearly and directly discussing payment terms up front is going to be awkward. We felt that too, in the beginning. But, after the first-time butterflies, you start to realize that it rarely is awkward. Payment is part of doing business, and your clients know that! In fact, discussing it directly and professionally up front relieves client anxiety around not knowing when/how to pay — ambiguity around payment is going to make everything more awkward/painful, not less.
Here is some example language you can use to explain the terms above:
“To avoid delays and keep work on schedule, we require a deposit and a payment method on file before starting work. We use [TOOL NAME] to store payment details with bank-level security.
Payments after the initial deposit are due at the pre-defined milestones outlined in the engagement. Our billing system automatically processes these payments as work is completed, keeping everything on schedule.
We will send reminders ahead of time for upcoming charges, and will send invoices/receipts on completion, so everyone can stay on the same page.
A similar system applies to our weekly retainer: we will initiate the charge and send a receipt with a linked invoice.
If for any reason a payment cannot be processed, we will pause work until we are able to resolve the issue and complete payment.
If there are ever any questions about payment or how we bill, do not hesitate to reach out. All of this is in the ‘Payment Terms’ section of our contract, if you ever need it.”
The most common response to this is “Great — how do we get started?”, at which point you can direct your client to a deposit form that will save the payment method on file. Not so painful, right?
In the case where you are working with a large organization that has its own billing system, or someone that insists on paying by check, it is important instead to emphasize that work stops if payment has not cleared on time. If payment is made by check, remind your client that they will have to send the check about a week before payment is due, to ensure that it arrives in time for the deposit to clear.
Let’s keep this section short: send receipts when you charge a client, so everyone has records in their inboxes. Receipts, combined with pre-charge reminders, create a double-notice system that does not require your client to do any work, while also giving the opportunity to ask questions.
In the spirit of “no surprises”, it is a good idea to send reminders a few days in advance of a charge, for anything but fixed, recurring charges like retainers. These reminders should include an itemized list of what is being charged for (can be as simple as “Website project: Milestone 1”), and optionally an explanatory note for any item that requires it (eg, “used $20 of the agreed upon stock asset budget”).
This approach allows folks to ask any questions before being charged (“how much of the stock asset budget do we have left?”), while also providing the piece of mind that they will not be blindly charged.
Though it can be helpful to mention upcoming payments in the context of other conversations, we find that email (preferably from a system rather than a person) is better for everyone — keeps administrative details out of service fulfillment conversations, while also providing a written record that the client can use as they see fit (such as if they must report on expenses to another person).
Charging frequently is both better for your cash flow (obviously), and better for your client’s experience.
Regular, smaller bills avoid the “wait...what is <line item from work done 6 weeks ago>? I don’t remember that...”, followed by you digging through your records, the 10 email chains you have with the client, and your project management system to hopefully find full details.
We also find that billing often makes clients super responsive. Payment is a good motivator to provide any assets you need for work, ask questions, give feedback, or raise any issues. It also acts as a tight reporting cycle, keeping the client in the loop on at least a summary of recent work.
For hourly work, we recommend billing weekly. This level of regularity builds the expectation of tight work cycles, leading to less communication gaps with clients.
For pre-scoped/pre-priced projects, we recommend including as many milestones as is reasonable.
The rule of thumb here is that each individual payment should feel small compared to the total price of the project, while also minimizing the amount of work you do on credit.
Do work => Get paid
If you only take one idea away from this guide, it should be that the key to getting paid on time is setting terms that make client payment as easy, obvious, and predictable as possible. Get payment details on file. Charge instead of requesting payment. Minimize work on credit (you are not a bank!). Charge frequently.
If you want contract payment terms that you can use, you are welcome to grab ours here.
Until next time, do work => get paid.
Developer with a sprinkling of designer. Been freelancing in some form since 2013, and am now one of the makers of Sail - letssail.co.