How to set payment terms for freelancers and contractors

Payment termsFollowing up on late, or god forbid non-paying customers, is no-one’s favourite task. Which is precisely why you need to set clear payment expectations up front – and in writing – before you work with a new clients.

“The initial conversation might feel hard, or even icky, but chasing payment down the track with no proof of client acceptance, is even harder (and far more icky).”

By communicating and agreeing on the non-negotiables for doing business with you, you’ll avoid awkward misunderstandings, frustrating disputes, and in most cases, the ugly hassle of debt collection or legal action.

These tips will help you pave the way for consistent cash flow by setting clear payment terms.

1. Minimum invoice requirements

As a business owner you required (and it is in  your best interest) to include the following information on each invoice:

  • The invoice date
  • Complete contact info
  • Your ABN
  • Client name and/or contact person (and their address if you have it)
  • Payment instructions (yes – we actually still see invoices with no banking details for people to make payment)
  • An itemisation of services
  • Due date for payment

“Basically, when creating invoices it is a case of more is more.  The more detail you put, the more chance you have of being paid on time.  Missing information = delayed payment.”

If you haven’t shared your payment terms in writing and a client won’t pay, you have little recourse. You won’t be able to charge a late payer interest on their balance owing, let alone engage the services of a debt collection agency without personally copping their hefty commissions/fees.

In addition to including your payment terms in clear and simple language on every invoice, be sure to state your payment terms early on.

Send along your policies in an email, include them in an agreement or contract, and/or point new clients to the terms and conditions outlined on your website.

2. What to include in your payment terms

It’s up to every entrepreneur to decide when and how much they need to be paid in order to operate a smooth, positive cash flow business.

As a starting point when setting payment terms, think of the troubles you’d like to avoid and how you could prevent them with the right policies.

In addition to when payment is due (i.e. on receipt of invoice, Net10, Net30) you might want to include:

  • Pre-payment requirements (i.e. a full or partial deposit)
  • Incentives for early payment (e.g. “if they pay early is there a discounted price?)
  • Payment options (credit card, paypal, direct debit forms)
  • Late payment fees (e.g. a certain % on the balance, accruing monthly)

You might also include a description of the products or services offered, delivery timelines, a reminder of the terms of your agreement, and what will happen if either party doesn’t stick to the policies in place.

If late payment fees are to be charged, keep in mind they need to be reasonable to ever hold up should the invoice be disputed or taken to a small claims tribunal.

3. Be prepared to follow up and follow through

Whilst chasing debtors is not fun, it is a necessity sometimes if you want to see your hard earned cash.  If customer can’t be put on direct debit, pay by credit card or payment made up front, you need to be willing to follow up.  Most accounting software providers now allow you to send automatic reminders which is a fabulous tool that you need to investigate.

The sooner you follow up, the less awkward the conversation and the sooner you should get your money.  The longer you leave it, the harder it becomes (for both you and the client).

Should you need to send the debtor to debt collection (if that is your terms) – then have the balls to follow through with it.  If you don’t, you just look like an easy target and any dodgy clients will take full advantage.  Choose a debt collection agency that you like and get good vibes from (you might need to , and if you do need them, understand that it is worth their fees and commissions to take the problem client off your hands.

“For freelancers and contractors, requiring pre-payment in the form of a full or partial deposit can really help avoid the “feast or famine” cash flow cycle. It is just sensible, and common, business practice these days.”

It can feel a bit intimidating to ask for payment before you’ve completed the work – but think of it as a client screening process. After all, it’s only the ones who understand you are offering a valuable service and are willing to pay for it that you want to work with.

As a secondary benefit, when clients invest up front they understand they are working with a professional and act accordingly. And if it turns out you do have a few late paying customers from time to time, those deposits you’ve collected will ensure you have the cash to carry you through.

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