Are 50/50 payments killing your cash flow?
Breaking project payments into two 50% payments is a common deposit structure, but could it be improved?
Late payments are killer for freelancer’s businesses. There are laws to encourage prompt payment, but these are inadequate for a number of reasons:
- They do nothing to address the widespread culture of late payment
- Freelancers have to have difficult conversations with late-paying clients they may otherwise want or need to retain
- The late payment of large sums can have a significant impact on the freelancer
- The fines don’t address the stress associated with late payment
It’s a tricky issue because freelancer’s situations greatly vary. Freelancers who work on a retainer-basis can handle payment with Direct Debits, but what about journalists who aren’t paid until their work is published?
It’s difficult to see how laws or the payment culture are going to change significantly in the short-term, so the onus is on freelancers to protect themselves wherever they can.
There are no one-size-fits-all answers. But, if you usually bill work in two 50% deposits (on commencement and completion), a small tweak to your system could dramatically improve your cash flow and reduce stress levels.
Deposits should benefit both sides
Taking payment in the form of deposits is useful. Deposits reduce the risk of a freelancer working without pay while simultaneously reduce the level of risk for a client.
It’s not uncommon for freelancers to require a deposit to secure their availability for months in advance. Others require a 100% upfront payment for projects below a certain value.
By far the most common deposit structure is 50% upfront and 50% on completion. This works and feels fair but it’s far from perfect.
The problems with 50/50 payment splits are demonstrated in these examples:
The web developer
After taking a 50% commencement deposit, they submit the first draft. Unlike the developer, their work is easily replicable if the client accepts the draft or only requests minor changes. They can’t hold the work back until the final balance is paid.
These examples demonstrate how a 50/50 deposit structure leaves the freelancer vulnerable. In both situations, the second deposit is at risk of delay or non-payment, even though the work is nearly 100% complete.
In my experience, this behaviour isn’t representative of most clients but it’s common enough to be relatable for many freelancers. The good news is that there’s a simple solution.
Adding a third milestone
Over the past year, I’ve structured deposit payments as follows:
- 50% upfront
- 40% after a specific project milestone, or 30-days (whichever is sooner)
- 10% when the project is complete, before it goes live
The second payment can be scheduled for any point in the project. As a web designer/developer, I write that the second payment is due before development on the live site commences.
The 30-day clause is rarely triggered because of the size of projects I work with, but it has the added benefit of keeping things on track. Your mileage may vary: bigger projects may need more milestones, but you’re probably doing that already.
I’ve used this structure on numerous deposit-based projects. It’s made a significant difference to my cash flow and taken the pressure off completing projects. Waiting an extra week for the final 10% is much more acceptable than waiting on half the total project fee.
It may seem scary, unjustifiable even, to hold 90% of the project fee when you’ve only completed 50% of the work. However, as the project progresses, that percentage of completed work is only increasing.
It’s important to think of this from the client’s perspective. Lots of industries require upfront payment for each ‘stage’ of work, so this will not be unfamiliar territory.
Another consideration is that the biggest risk to clients is the first 50% deposit. Once that’s paid, and work begins, they’ll be reassured by seeing the fruits of your labour and the experience of working with you.
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Separating business and personal money
I didn’t set up a separate business bank account until I’d been trading for nearly six years.Read
Following up on payment terms
How to manage long payment terms and get paid quicker.Read