Asking for upfront payment is common across many industries, but is it always a good idea?
Requesting partial or full upfront payment is standard practice for many. It makes sense: You protect yourself by minimizing chances of non-payment, improving your cash flow, and having access to more working capital to keep your business afloat.
But is asking for upfront payment always the right decision? Are there instances where it’s a bad idea?
Read on to learn more about whether asking for upfront payments makes sense for your business.
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What Is an Upfront Payment?
An upfront payment or deposit is a payment made by the client before you start the work. These payments are widespread among independent contractors, freelancers, creatives, and service-based businesses.
Upfront payments can be percentage based (50% of the project’s value) or a flat fee. Some contractors may also request the entire payment upfront instead of a partial one. How much you choose to charge is entirely up to you, and while there’s no single formula to help you, you should, at the very least, cover your costs.
Something also worth noting is how an upfront payment is represented on your books from an accounting perspective. Because it is cash you have not yet earned by doing any work for the client, it is represented as a current liability when payment is made.
This means that when observing the double-entry rule, you will first debit (decrease in value) the cash account and then credit (increase in value) the customer deposit account (liability account). Once you have completed the work, you will remove the liability by debiting the deposit account and crediting the revenue account.
The Advantages of Asking for Upfront Payment
1. You Minimize the Chances of Non-Payment
Have you ever completed work for a client and struggled to get paid? It’s a common problem felt by many service-based businesses, especially when times are tough.
You now have to go through the process of chasing the client for payment and sending reminders, which are not only a time suck but an emotional drain. Clients who pay upfront are less likely to skip a payment or ghost you later down the road, which provides you with peace of mind and helps you control your cash flow.
2. You Weed Out Bad Clients
What does it say about a potential client’s willingness or ability to pay you in full later if they’re unwilling to pay upfront to kickstart the project? It’s not a good sign, that’s for sure.
We understand that turning down a big job because a customer doesn’t want to pay a deposit is difficult, especially if it’s a dream or a lucrative job.
But on the flip side, imagine doing all that work and not getting paid for your services. Also, think about the opportunity cost: The alternative projects you could’ve worked on instead where customers would’ve happily paid you a deposit upfront.
So view deposits as a tool for filtering out customers your business doesn’t need and attracting those you do: Those who pay well, pay on time, and are a pleasure to work with. You’ll thank yourself later.
3. Your Client Becomes Invested in the Project
Clients who invest money in a project are more likely to invest their time and give input. And the success of any new project requires this input.
For example, if you’re an agency that specializes in content marketing, the customer needs to give you details about their target audience, goals, and other pertinent information.
You may also need their approval on anything you submit. Such input starts at the beginning of a relationship and should continue indefinitely.
But upfront payment is not only about getting clients invested in the project.
Have you ever been in a situation where a customer slips off the radar halfway through the project’s completion? You can’t reach them via email. You can’t get them over the phone. All you hear is crickets. Yes, this does happen!
The fact that they haven’t spent a single penny makes the decision that much easier. Get an upfront payment to prevent it, or at least so that you can soften the blow when it does happen.
4. You Get Working Capital
You’re halfway through a project only to discover that you don’t have enough cash to sustain operations. You now scramble to get that cash injection. After all, you have to pay contractors and employees. That’s not to mention your other day-to-day expenses.
An upfront payment gives you working capital for those situations and is useful for larger projects requiring lots of cash.
5. Getting Paid Upfront Saves You Time and Energy
When receiving full payment upfront for a project, you save time and energy by not having to send payment reminders and go through a lengthy collection process to get your payment.
Questions to Ask Yourself When Deciding to Charge Upfront Payments
While charging upfront payments has its benefits, they aren’t always suitable. Ask yourself the following questions to determine if you should request upfront payment.
1. Are They a New or Existing Client?
As a freelance writer who’s a member of numerous Facebook writing groups, I’ve read many status updates about how a writer wrote an article and submitted it, only to have the client vanish. Without a trace.
A new business relationship is exactly that—new. You don’t know this person, haven’t built rapport, and there’s no trust. Who’s to say they will pay you?
Charging an upfront payment for new clients is advisable. It’s even more important today, as more people are working remotely than ever before for clients near and far.
If you’re a freelance designer living in Canada, working for a client in England who doesn’t pay, what will you do? It’s not like you can bang on the door and say, “Hey, where’s my money?”
But not every new customer requires an upfront payment. There are instances where you might consider forgoing an upfront payment:
- If your customer is an established company. They couldn’t have built a stellar reputation without paying contractors, right?
- If a friend referred the client. Your friend wouldn’t refer you to a client that doesn’t pay, right?
2. What About Existing Customers?
I’ve often asked for an upfront payment at the beginning of a relationship but dropped it over time. Why? Because I’ve built a relationship with the client. I’ve learned to trust them. I’ve learned that they always pay on time, and I don’t need a deposit to protect myself. I can focus on what’s important: Creating work that meets the needs of my clients.
3. What Is the Dollar Value of the Project?
A small-value project may not need an upfront payment. In fact, creating these invoices may become inconvenient for you and your client.
Why? Because you create more work for yourself and your client incurs more expenses in having to pull out their credit card regularly. Instead, aspire to be a low-maintenance service provider.
4. What Is the Size and Duration of the Project?
Major and long-term projects require upfront capital or, at least, payments at regular intervals. After all, you have expenses, contractors, and bills to pay. Any reasonable client will understand this.
Getting Money Upfront: How Much Should You Charge?
No single formula will help you determine how much to charge upfront. Still, as a rule of thumb, ensure the upfront payment covers your costs.
Some projects require a significant capital outlay, while others don’t. For example, consider a design-build company that’s undertaking a large project.
They need an upfront payment to buy supplies and other materials. As the project progresses, they also have to pay contractors and cover other unexpected expenses.
A contrasting example is a freelance designer or writer. Projects don’t require much working capital but rather an investment of skills and time. Even so, charging a deposit is good practice as it provides security.
For new clients, I usually charge a 50% deposit before I even put pen to paper. But I do have a lower limit of 30% if I get pushback from the client. After doing some digging on Quora, it seems that the ceiling is 50% and the lower limit is 20%.
One freelance translator charged 20% upfront for half the work, 40% for the rest, and 40% upon submission. There are different approaches, but it boils down to what you can negotiate.
You should also understand that in the same way you’re scared of the client vanishing without paying, some may be scared you’ll disappear with their money.
That’s why if the client is wary of upfront payment, reassure them by referencing past work and testimonials.
If that still doesn’t work, you may need to compromise. You can use an escrow system: A third party holds the money and releases it when you complete the work. It reduces the risk for both parties and is useful for new relationships.
At the end of the day, you don’t build trust overnight. It takes time.
The Bottom Line on Paying Upfront
There’s no doubt that asking to pay upfront is beneficial. It helps weed out bad clients, minimizes the chances of non-payment, gives you more working capital, and gets clients invested in the project.
But you cannot ask for an upfront payment every time. There are situations where forgoing the deposit is the best option. Analyze each case by asking these questions:
- Are they a new or existing client?
- What is the dollar amount of the invoice?
- What is the size and duration of the project?
If you do decide to charge a deposit, understand that there’s no golden rule. It depends on what you can negotiate. But there are upper and lower limits.
Find what works for you and understand that some clients won’t want to pay upfront. Assess the situation to see if it’s due to genuine concerns of getting ghosted or because they’re simply a bad client. Then make a decision, either compromising by lowering your upfront payment or using an escrow system, or deciding to pass on the opportunity altogether.
This post was updated in December 2022.