On payment terms

As a freelancer or small business, maintaining a positive cashflow is crucial if you want to stay in business. Late payments are a business killer and long payment terms are nearly as bad.

I work with individuals, small businesses and startups. One of the things I like most about working with clients that fall into these groups is that I’m usually working closely with the business owner. It’s fantastic to feel the buzz of excitement from the stakeholders, especially when the project goes live.

From a business point of view, one of the benefits is that my clients don’t tend to have large finance departments and all the bureaucracy that comes with them. As a result, and because it’s easy to quickly pay invoices these days, my payment terms are seven days from receipt.

Occasionally, a new client will ask me to extend these terms as they haven’t come across them before. I’ve written this post to explain how I settled on seven days and why they’re shorter than the traditional business terms.

Where it all began

Back in September 2009, Simon Campbell of Erskine Design wrote an insightful post detailing the history of 30-day payment terms. The blog may be confined to the web archive, but it makes for fascinating reading if you’ve ever wondered how net-30/60/90 payment terms came about:

It makes a compelling case for the necessity of 30-day terms when payments were based on invoices and cheques sent through the post and manually passed through multiple departments.

Fast-forward to 2018 and it’s hard to justify these archaic payment terms with the number of near-instant payment options available. Payment on receipt may not always be possible, but seven days seems reasonable.

The long wait

When freelancers accept long payment terms, they become credit providers to their clients, hoping that at the end of the 30/60/90-day period the client will still be in good standing to settle the debt.

This is not intended to be flippant. If giants like Carillion can fall (with their 120-day payment terms), freelancers have to be careful in offering credit to clients of all sizes.

Alternative payment terms

In the design industry, it’s common to require a commencement deposit before work begins and release of the final balance before files are handed over. This is widely considered to be fair for all parties and, in my experience, generally results in prompt payment.

For other types of work where this may be impractical, my contract specifies seven-day payment terms. I’d encourage other freelancers and small businesses to do the same, whatever industry they’re in.

Where there’s no avoiding long payment terms, perhaps due to a juggernaut of a finance department, I will tend to bill on a weekly basis. This means I only wait for that payment period once before starting to receive a weekly income.

A win-win

For clients, offering or accepting shorter payment terms has a couple of immediate benefits. Firstly, the freelancers that you want to work with are more likely to want to work with you. For some freelancers, 30+ day payment terms are simply unaffordable and for others they’re a red flag.

Secondly, if the freelancer isn’t worried about cashflow, they’re likely to produce better work. Long payment terms and late payments can have a significant impact on a freelancer’s cashflow and, ultimately, their stress levels. Shorter terms mean the freelancer is less likely to be worrying about money, and can spend more time focussing on your project.

Finally, and perhaps most importantly, shorter payment terms also help to ensure a freelancer will be around in future. Perhaps for an update to the current work or a new project. What’s not to like?

Update: After the debate that surrounded this post, I’ve written a follow-up that covers some more methods freelancers can use to manage and prevent late or non-payment.