Should you require up-front deposits from clients?
Tim Berry has an interesting blog for entrepreneurs. Lately, he's been commenting on how to start a consulting business. In one post, he said, "For the record, I never did that advance payment or deposit stuff
with clients. Businesses don’t expect to have to pay upfront, and mine
never did. The good news is that I never had an invoice that wasn’t
paid. Take risks on the client paying. Don’t ask them to take risks on you."
To which I commented, "Wow, you’ve never been stiffed by a client? That’s pretty lucky; most of us consultants have been left with unpaid invoices. If you’ve never had this happen, then I don’t know if you’re doing something right (working with clients with stellar payment ability) or doing something wrong (never taking a risk).
To which I commented, "Wow, you’ve never been stiffed by a client? That’s pretty lucky; most of us consultants have been left with unpaid invoices. If you’ve never had this happen, then I don’t know if you’re doing something right (working with clients with stellar payment ability) or doing something wrong (never taking a risk).
"You should use common sense with advance payments and deposits. If your client is large and creditworthy, then don’t require up-front payment. If your client is small, if you’re being hired to consult on a turnaround of a troubled company, if your engagement requires significant travel or incidental expenses that have to be covered, then get a downpayment. I have never had a problem getting advance payments when I asked for them. If you have a good reason to ask, then be leery of the client who can’t or won’t make that payment."
Who is right? I suppose we both are.
Looking back, I have often required partial payment in advance for consulting jobs. I usually require roughly a third or a half up front when I write a business plan. I do this because I am about to make a substantial investment of time (and occasionally money). I also do this because the clients are usually individuals, who have not yet even started their business.
On the other hand, I don't usually ask for anything up front for accounting services or work that will be performed on a regular basis. And, if I've worked with you once, then I certainly won't ask for anything up front again.
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Like anything in life, one should never say "never". But my general rule of thumb is never to ask for a downpayment in advance for a consulting engagement. Consulting is one of the few professions left in which business is based on relationships and a handshake or verbal agreement are expected to be enough to start work. This certainly doesn't mean you don't have a signed contract, with agreed upon payment requirements, before you commit significant resources to the project. It does mean, if you want the work, you have to honor the fact that your client will always have waited too long to hire you and everything you are involved with will be treated like a crisis. If you take the risk of trusting your client up front and are willing to get to work on his/her project ASAP, you will probably have a client for life (assuming you do good work). If you focusing on the contracting details at the beginning of the relationship, you will have a client who treats you like an attorney - a necessary evil who must be kept at arm's length and used only when absolutely necessary.
I have never been stiffed by a client in the 16 years I have been working as a consultant (although a few have been slow to pay). I have been stiffed once on a consulting contract, but I was by a consulting firm I was subcontracting with (yes your fellow consultants should be hogtied with contracts and payment agreements, before you work with them - just kidding). I do believe that upfront payments are appropriate if there are significant startup costs such as international travel or expensive domestic travel, payroll expectations which you have to meet regardless of if or when the client pays, and / or if the client is obviously in financial trouble and that's why you are being asked to help.
Otherwise, consulting is a relationship business built on trust. After all, the client is often trusting you to tell them what to do to improve the way they run their business. There is no greater risk or act of humility than to ask for help in raising your own child and similtaneously putting your professional reputation in someone else's hands. If you were in that position, who would you hire - the person who listened to your problem, made a comitment to help you fix it, and shook your hand on it or, the person who insisted on getting your problem, their commitment, and the required deliverables down in writing, along with a down payment, before any work began?
That's just one of the things that make consulting so entertaining.
Doug Schaffer
Managing Director
The Best Consultants. LLC
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Doug,
Thanks for your comments. They provide a new perspective, and the use of a contract is certainly a variable that may render up-front payments less important.
I'll just reiterate that every situation is different. The fact that I have worked with some very new or small or troubled or challenged businesses is probably related to the fact that I have been stiffed before. And, that's also why I sometimes require payments in advance.
When I was very new and small myself, the advance payments were useful, because I didn't have a contract. I still rarely use contracts, unless the size or scope of the engagement demands it. If I were to have a contract with clear objectives, deliverables, and payments, then I probably wouldn't also need money in advance.
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