Over the last week an interesting conversation developed on my small business forum on the subject of collecting a deposit before beginning service based work like design. Standard practice is for web designers to collect a deposit for a project prior to starting work. There are some reasons why as well as a few issues associated with the practice.
The forum thread got me thinking more about something I’d considered a tried and true practice. I thought it would be interesting to revisit the idea of collecting deposits, why it’s standard practice for many, and whether or not there are other alternatives.
When I first started a freelance web design business. I didn’t ask for deposits. It made me feel uncomfortable to ask a stranger for money before having done any work for that person. I also wanted to run my business with more trust, more me proving my value before asking for money.
After talking to a client on the phone or exchanging emails I wanted to believe everything would work out fine. I wanted to believe the hard part was getting the client to contact you in the first place and after that the rest would follow easily.
Boy, was I naive.
Unfortunately early on I was ripped off a couple of times by people who never had any intention of paying. I always held on to project files until payment was made so they didn’t get anything from me, but I did put in considerable time developing a site without ever getting paid.
These experiences were few and far between, but they did occur and one or two is more than enough to make you want to protect yourself.
Another experience over the years has been with clients who continue to expand the project during the development lifecycle. On several occasions where I didn’t collect a deposit the client would continue to add to the scope of the project just as I was about to finish and be able to collect. Without asking for money the project would just continue further locking me into having to finish the new requests because of how much I’d invested already in the project.
Eventually I decided upon the rule that prior to beginning work I would ask for a deposit. I was nervous the first time I asked, though it’s never been an issue or cost me a job. It’s not the first thing I bring up with people. I usually wait till a time when I feel confident the client will hire me. Never has someone backed out because of my asking.
As a rule I now ask client’s for a deposit. With some long time clients I won’t and with very small jobs where the final price is going to be small enough where I can afford to lose the time, I may not ask for one either. I do know some service based providers who ask for payment in full prior to starting a small job.
One other advantage to asking for deposits is they help smooth cash flow. Many freelance designers will find themselves busy one month and not so busy the next. You’ve probably experienced a few times where you were waiting on a big check while looking at the all the bills you needed to pay yesterday.
Asking for a deposit breaks up the one large check into 2 or 3 smaller ones and makes it more likely there’s some money in the account when you’re paying the bills and for those times you want to invest to grow your business.
The Issue of Trust and Minimizing Risk
There’s a question of trust in all business transactions and relationships. When you’re first starting to work with a new client neither of you know each other. You don’t know if they’re going to pay. They don’t know if you’re going to do the work. At some point you do need to trust each other if you’re going to work together
Without a deposit you as designer take on 100% of the financial risk in the project. While most client’s are good and honest people, it’s possible you can finish a site or application, hand off all the files to the client, and never receive a dime. Or the client could see your finished work decide it’s not what they wanted and move on. Either way you put in a lot of work for nothing.
On the other hand if a client gives you a deposit then they’ve taken on the financial risk for an amount equal to that deposit. They don’t know at that point if you’ll deliver anything. Sadly some designers never do. There are certainly stories of clients paying without ever getting anything in return.
The major difference with the deposit is no one is taking 100% financial risk for the project. In the beginning the client risks 50% (assuming a 50% deposit) of the price of the job as a show of good faith.. After you as designer have finished half the job you’re risking more and more until the project is finished where you’re now at risk for 50% of the project price.
Some designers will use a payment schedule like a third up front, a third after the client has signed off on the design comps, and a third on completion. In this way no one is ever at risk for more than a third of the the total cost of the project.
Ultimately someone will be at risk during project development and you and the client need to trust each other to work together. Ideally you’ve gotten to know enough about each other to have developed some level of trust and some level of relationship. You both ask questions of each other and trust in small ways until you feel comfortable working together.
Asking for a deposit or payment schedule minimizes the absolute risk you take on with any new job.
Some Service Based Business Don’t Require Deposits
In the forum thread I pointed to at the start of this post, it was mentioned that a number of service based business exist where payment is 100% after the work is finished. Not everyone asks for a deposit. These might include:
- Auto Mechanics
- Dry Cleaning
Those are just a few I pulled from the thread and we can easily add to the list. Clearly the standard with some service based businesses is not to collect a deposit.
Plumbers and electricians will sometimes charge for the service call whether you accept the work or not. In some ways this is similar to a deposit in that it minimizes their risk in coming out to your home. It also serves as incentive for you to hire them. Not all will do this so I don’t know if it’s an industry wide standard.
Why do some industries require a deposit where others don’t? What can you do in order to collect on an unpaid invoice?
Your Recourses for Getting Paid
I think a big part to the questions above is the recourse the services provider has. Take an auto mechanic. If you don’t pay they keep your car. They did take a deposit and the deposit is your vehicle. You’re going to pay. The same is true of for the dry cleaner. They have your clothes. You want them back and so you’ll pay their bill.
No monetary deposit was necessary in either case because your physical property stands in lieu of a financial deposit.
Think about plumbers and electricians. They aren’t asking for a deposit and they don’t hold your property. They do have a physical presence. They could for example not leave until you pay them. They also know exactly where you live so they can continue to come back asking for payment.
With the dentist you’re going to need his or her services again. You could always switch dentists, but how long do you think it would be before word got around with the other dentists in your area if you never paid your bill?
All of these business not collecting a deposit have other recourses for getting paid and minimizing their financial risk. Most online service based businesses, designer’s included, don’t have these recourses. We can hold onto the files we’ve worked on or created, but that’s pretty much it. If a client refuses payment there’s only so much we can do to collect. Most of us would take the loss and eventually move on to the next client.
The Type of Client Makes a Difference
Another idea that arose in the thread was that you wouldn’t necessarily ask a large corporation for a deposit. The decision to ask for deposit does have something to do with the type of client. That is true, but there are reasons for that.
- There’s more to gain with a bigger client. Your corporate client likely has a bigger project, with a greater price, and a greater potential for more of the same. With greater reward comes greater risk. That is to say we’re usually willing to take a bigger chance when the potential reward is that much greater.
- Recourses do exist with the bigger client. Where you might not require a signed contract for a $500 job, you more likely would for a $10,000 job. Even if you don’t the corporate client will almost always insist on one. That contract comes with legal protection as does the price of the job. It’s not usually worth it to take a $500 client to court. It would be worth it to take the $10,000 client to court.
- There’s a different kind of trust involved with the larger client. True you don’t really know the client, but you’ll have more trust for getting paid from IBM than you will from John Smith (Apologies to all the decent and honest John Smith’s of the world). You’re less likely to think IBM will welch on the bill. They might not pay as quickly as you like, but you feel confident they will pay your invoice.
Even with all of the above you still might collect something prior to completing work. A project from a large client might take months, even years to complete, and few expect a small business or freelancer to not collect anything for that length of time. It’s entirely likely the corporate client would set up a payment schedule with you.
Another type of client who you might not seek a deposit from is a repeat client. You’ve gotten to know each other and have developed a trusting relationship with them. Some of my clients have been clients for years and we’ve reached a level of trust where I don’t ask them for a deposit and they don’t ask me how much a job will cost.
Either of us could get screwed, but we’re comfortable enough with each other to know this isn’t going to happen and both of us will do what we can to make sure the other is happy in the case of disagreement. Treating existing clients with a greater level of trust is one way to grow your business and get them to recommend your services.
Alternatives to Deposits
From reading above you can probably tell I think asking for a deposit is important to your success as a freelance designer. Are there alternatives? Are there other ways we could minimize the financial risk when taking on a project?
The idea of looking for alternatives is one that came up in the forum thread, in part, as a way to help differentiate your business. If everyone requires a deposit and you don’t then clients might be more willing to work with you as there’s no risk to them to get started.
Contracts are one way both designer and client gains some protection. Legal protection is a great thing to have, but again you probably need to go to court to get the benefit of that protection. Is it worth going to court to recover $200? $500? $1,000? At some point the money involved is worth time in court. Where that is may not be so clear. Contracts can be great, but unless you can realistically enforce them they aren’t worth the paper they’re printed on.
You also have to consider the issue of working with people in other countries. Which country’s laws apply? Where would the case be tried? Is it possible to get both parties physically present in court? These questions shouldn’t keep you from getting a signed contract. They’re simply to point out that a contract isn’t necessary a perfect way to recover a non-paid fee.
One idea that came up in the thread was to use an escrow service. An interesting idea though one I don’t think reasonable for small jobs. The escrow service will naturally want to be paid. Which side ultimately pays the fee. client or designer? For a small job it really doesn’t make sense to pay a third party to hold the money.
A similar idea would be to hire an arbiter to settle disputes. Again this probably isn’t a realistic idea with a small job due to the cost involved.
You might think holding onto login information for various aspects of the client’s site would be enough to give you some assurances of being paid. The thought has occurred to me once or twice to simply return a client’s site to the exact state prior to my working on it when they were avoiding paying my invoice. I often make a backup of files before working on them so it would be easy enough to download the modified file and replace it with the original.
This isn’t an ethical solution in my point of view though, and in the end still doesn’t get you paid. It might keep the client from getting your work for free, but it’s not something I would endorse. It breaks trust and ultimately could impact your brand in a negative way.
You can also try anti-marketing where you spend time promoting through various channels How the client in question doesn’t pay bills. Again not the most ethical solution to the problem, but one that probably feels good.
That’s about all I can come up with for alternatives and none works as well as asking for a deposit or setting up a payment schedule. I’m, always open to new ideas and if you have any I’d be happy to hear them. For now though, I’ll stick with collecting a deposit and occasionally taking a chance with some clients.
Collecting a deposit for web design work has become the standard way of doing business for a reason. Sadly it’s too easy for bill to go unpaid when you never physically meet a client and have little to no recourses for collecting your fee. In an ideal world there would be no need to get paid something upfront, but the world we live in is far from idea.
Most clients are good and honest people with every intention of paying your bill. However all it takes is one or two not so good and not so honest people to rip you off before you have to pull some trust back from everyone.
A deposit lessens the absolute risk either party takes. No one is then risking 100% of the financial cost of the project. It takes some of your risk and places it on the client, but overall it’s fair to both parties. Don’t be afraid to ask for a deposit.
Do you ask for deposits before starting a project? If so are there times you won’t ask for one? Do you only consider them when the project price will go over a certain amount? Any ideas for ways to protect yourself without asking for a deposit?