Asking for a deposit is common across many industries, but is it always a good idea?
Requesting a deposit is standard practice for many. It makes sense: You protect yourself by minimizing chances of non-payment and have access to working capital to keep your business afloat.
But, is it always the right decision? Are there not instances where it’s a bad idea?
We highlight the benefits of deposits, provide guidelines to determine when to ask for one and help answer a question that’s probably on the tip of your tongue: How much should I ask for?
Let’s get to it.
The Advantages of Asking for a Deposit
1. Minimizes the Chance of Non-Payment
Have you ever completed work for a client and struggled to get paid? It’s a common problem for many service-based businesses, especially when times are tough.
Requesting an upfront deposit weeds out clients who don’t pay. The chances of getting full payment from them are higher if they pay a deposit.
2. The 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 client 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 it’s not only about getting clients invested in the project.
Have you ever been in a situation where a client slips off the radar halfway through the project? You can’t reach them via email. You can’t reach them over the phone. All you hear is crickets. Yes, this does happen!
The mere fact that they haven’t spent a single penny makes the decision that much easier. Get a deposit to prevent it, or at least, so that you can soften the blow when it does happen.
3. Provides Working Capital
You’re halfway through a project only to discover that you don’t have enough money 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.
A deposit gives you working capital for those situations and is useful for larger projects that require big sums of money.
While charging deposits has its benefits, they aren’t always suitable.
Questions to Ask Yourself When Deciding to Charge Deposits
Ask yourself the following questions to determine if you should request a deposit.
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, 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 a relationship and there is no trust. Who’s to say they will pay you?
Charging a deposit 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 are you going to do? It’s not like you can bang on the door and say, “Hey, where’s my money!”
But not every new client requires a deposit. There are instances where you might consider forgoing the deposit:
- If your client is an established company. They couldn’t have built up a stellar reputation if they weren’t paying contractors right?
- If a friend referred the client. Your friend wouldn’t refer you to a client that doesn’t pay, right?
What About Existing Clients?
I’ve often asked for a deposit 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 my clients like.
What Is the Dollar Value of the Project?
A project of a small value may not need a deposit. 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. Rather aspire to be a low maintenance service provider.
2. What Is the Size and Duration of The Project?
Major projects 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.
How Much Should You Charge?
No single formula will help you determine how much to charge. Still, as a rule of thumb, make sure the deposit covers your costs.
Some projects require a significant capital outlay; others don’t. For example, consider a design-build company that’s undertaking a large project.
They need an upfront deposit to buy materials and other supplies. 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; 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 50% and the lower limit is 20%.
One freelance translator, charged 20% upfront for half the work, 40% for the rest and, finally, 40% upon submission. There are different ways to skin a cat but it boils down to what you can negotiate.
You should also understand that in the same way you’re scared that the client vanishes without paying, they’re scared you’ll disappear with their money.
That’s why if the client is wary of paying a deposit, 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.
The bottom line is: you don’t build trust overnight; it takes time.
There’s no doubt that asking for a deposit is beneficial. Clients become invested in the process, it minimizes the chances of non-payment and gives you working capital.
But, you cannot charge a deposit every time. There are situations where forgoing the deposit is the best option. Analyze each situation by asking the following 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, aware that some clients don’t want to pay a deposit in fear that you’ll simply take the money without doing the work. In these situations, compromise by lowering your deposit or using an escrow system.
Do you charge a deposit? If so, how much?
This post was updated in April 2020.