Monday, 14 December 2015 15:34

Four reasons you should ask your new client for a deposit

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When you sign up a new customer or client, it’s tempting to skip the formalities. New customers are always keen and it seems like nothing can go wrong. The last thing you want to do is sour the relationship, or risk losing a client to a competitor. If you ask for a deposit, are you at risk of scaring them away?

In truth, most businesses are used to paying deposits especially if they are dealing with freelancers or micro businesses, and there are plenty of good reasons that you should ask for one.

Let’s run through four of the clearest benefits you should be asking your new client for a deposit upfront.

1. Measuring the commitment of the client

If your client pays you a deposit, it proves that they are serious about the work and this new working relationship. If they stall or make excuses, they might be planning to hang on to their cash until they decide that you’re ‘worthy’ of being paid.

Remember: clients have all the power in this situation, but they should be willing to pay to reserve your time. If they don’t, they might not be as trustworthy or professional as their first impression made out.

2. Reducing your exposure to risk

If a relationship goes bad, and a client goes AWOL, this can result in months of chasing bad debts. We frequently chase tiny invoices owed to freelancers and sole traders, because larger companies expect to get away with not paying.

Your client may assume you’ll roll over under pressure and write off an unpaid amount. If you can decrease your exposure, you’re reducing the risk of letting a rogue client try it on, which means you’re less likely to need us for debt recovery.

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3. Easing your own cashflow

You’ve probably noticed that large businesses try to hold on to their cash as long as possible, paying you on the latest possible date they can. Depending on your point of view, this is either smart cash flow management, or a bullying tactic.

Either way, getting a deposit upfront means part of the fee is in your bank for longer, so it’s your cash flow that benefits. Not only do you get the interest, but you also have cash upfront for materials or additional works.

4. Risk management

What is the exact name and legal status of your new client? Often, small businesses leave these important details until it’s too late.

It’s critical that you know the exact legal status and identity of your client at the start of any business relationship. If you don't know who or what you are dealing with it is impossible to identify the risk involved in offering credit.

Asking for a deposit with confidence

If we’ve convinced you to take deposits on your work, the next stage is to decide how much to ask for.

Requesting 50 per cent upfront is reasonable. In fact, many large businesses will expect it.

If you haven’t worked with the client before, and they run a small operation, they may have reservations about paying so much. If you sense reluctance, ask for 25 per cent initial deposit, and then follow this with staged milestone payments at 50 per cent, 75 per cent and 100 per cent or with weekly invoices on very short credit terms. This allows you to closely monitor your credit risk and manage your cashflow to accommodate it.

And remember: even the most profitable business can quickly slip into financial difficulty, so a perfect payer may become a problem client down the line. If possible, ask for a deposit for every project. That way, you’re constantly protected from the vagaries of their cash flow.

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