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The Freelance Isn't Free law in New York City mandates payment within 30 days of work completion. Learn more about the law and demand similar protections from lawmakers in your city.

Hi. Can I borrow $5,000 to pay for your design/accounting/consulting/freelance services? I’ll pay you back in a month or two, after you’ve completed the work.

No? I didn’t think so.

Yet this is effectively what we are doing when offering clients net-30 payment terms. The only difference is that, instead of giving the client cash like with a traditional loan, we are trading dozens of work hours for the promise of future payment.

When did we get the idea that freelancers should also be small-scale lending institutions? We certainly do not seem to be very good at it — how many of us charge interest, keep a debt collection agency on retainer, or assess the credit risk of prospective clients? Without these protections, we bear the full cost of non-payment, with none of the interest income.

I’m not the first person to complain about net terms — the internet is full of articles on how to reduce the pain of net-30/60/90, advocating for late fees, invoice factoring, and other measures. I’d like to propose a simpler solution: stop offering net-30 terms.

You are not a bank, do not work on credit.

Brief History Net Terms

Net 30/60/90 terms come from the world of manufacturing. Suppliers in the manufacturing space offer their customers net terms as a way to extend credit. This allows purchasers to buy more widgets up front, which are then sold to generate the cash to repay the 30/60/90-day credit. Even in this space, net terms are only offered to established customers, or those that can prove credit worthiness.

Not to get too technical, but this system is effectively a collateralized loan — if the purchaser fails to pay, the supplier can recoup the unsold widgets, and sell them to another customer.

This simply does not make sense with personalized services like design, accounting, or consulting. Work-product in these disciplines is nearly impossible to resell, meaning there is nothing to recoup and pass on to another customer, to get that money back.

Plus, going out on a limb here, I’m guessing you do not have a finance department building non-payment risk into your pricing, or an actuary assessing credit worthiness of each client.

Net Terms Kill Cash Flow

In the best of circumstances, where all clients are remembering to pay on time, net-30 terms put an incredible amount of stress on your bank account.

For example, let’s say you bill 30 hours/week, at $100/hour, and invoice twice a month on net-30 payment terms. That means you are billing about $12,000 per month (congrats!). Yet, at any given time you are owed $18,000 on outstanding invoices.1 Eighteen thousand dollars! Do you have $18,000 that you’d like to lend to clients? How much of your time do you want to spend chasing down payments?

Giving out that much credit can make it hard just to run your business, much less grow it. To extend the previous example, if you want to go from billing about $12,000/month to $16,000/month, you now have to extend an additional $6,000 dollars in credit. Hard to hire that extra subcontractor or commission assets you may need for your work, when fronting all the money yourself.

Net terms are so bad for cash flow, that there is an entire industry of Invoice Factoring built around giving out payday loans to freelancers with outstanding net-X invoices. When you have to pay interest on money clients owe you, you know your payment terms are bad.

Net Terms Hide Problems

If there is a problem with a project, or any kind of issue that is going to delay payment, you need to know about it now, not 30 days and 120 hours of work-on-credit later. These problems generally fall in two categories: client cash flow, and project-specific issues.

If there is a cash flow issue, then you can pause work while your client resolves it (you are not a bank!). Clients with cash flow issues are often working so hard to resolve these issues, that they are sure they will be able to pay eventually. It is hard to fault an entrepreneur for believing in what they are doing, but you most certainly should not be extending them credit.

Project-specific issues can be anything from disliking the way a deliverable is laid out to a misunderstanding around scope of work (“I thought this was supposed to include ?”). If there is a misunderstanding around work, it is almost always easier and more pleasant to fix it immediately, then let it stew until payday. Best case scenario with last-second issues is timeline delays. The worst case is the client uses their thousands of dollars in leverage over you to get free work outside of the scope of the project.

There is a better way

Luckily, we have the power to set terms that actually make sense for our freelance businesses. Setting good payment terms is a big topic, so my colleagues and I wrote a guide to payment terms that includes downloadable copy of the payment terms we use with clients. I encourage you to check it out if you are looking for a better way.

One last time, for good measure:

You are not a bank, do not work on credit.

Matt Fulton is a developer with a sprinkling of designer. Been freelancing in some form since 2013, and am now one of the makers of Sail - letssail.co.