Running your own business offers flexibility and freedom. But with that flexibility comes certain tradeoffs—and one of those is trying to manage cash flow with irregular customer payments.
According to one study, the smallest businesses wait an average of 72 days before their invoices are paid. For freelancers and small business owners, waiting more than two months for a paycheck can bottleneck cash flow and cause serious issues.
“Delays to payments put enormous pressure on small businesses’ cash flow—they have to meet overheads, tax bills and their own supplier invoices whether they’ve been paid or not,” said Jeff Longhurst, Chief Executive of the ABFA, the organization that authored the aforementioned study. “Smaller businesses are particularly vulnerable. No matter how successful they are, if just a few invoices aren’t paid on time, they could end up in serious financial trouble.”
Fortunately, there are plenty of preventative tactics you can put in place to curb late payments and encourage clients to pay up even when they’re well past due.
So, for those freelancers and entrepreneurs who need a little cash-flow assistance, continue reading to learn more about getting paid on time.
5 Tactics to Get Clients to Pay Faster
You don’t need to wait until the end of the month to send your invoices out to clients. Rather than waiting for a specific date, submit your invoices as soon as a project is complete.
As a freelancer, I’ve established the expectation that I’ll submit an invoice when I email a finished draft to my clients. Not only will your clients know when to expect invoices, but the faster you submit invoices, the sooner they’ll be paid.
Offer multiple payment options
One way to encourage on-time payments is to also offer your clients multiple ways to pay. Different accounting departments prefer to make payments in various forms, so accepting multiple methods helps set you up for success. Some of the easiest methods to set up and accept are credit cards, bank payments/wire transfers, direct deposit (they’ll need your bank account information for this), PayPal, and paper checks .
When you’re first building your relationship with your client, highlight the different payment methods you accept and the ones you prefer for payments. Try to nudge them toward electronic payment options—paying by check takes far longer since they often snail mail it to you, then you’ll need to deposit it and wait for it to clear.
Create a contract (and stipulate a late fee)
When you begin your relationship with a new client, it’s wise to get a service agreement in place. Not only does a formal contract protect you and your business, but it also helps you initiate the sometimes-awkward conversation about payment dates.
When drawing up your contract, you can negotiate and outline payment frequency (semi-monthly, monthly), specific payment dates, and preferred payment options. If you want to be paid within 15 days of invoicing your client via direct deposit, then you can specify those terms in your agreement.
A service agreement is also an ideal place to highlight late fees for delinquent payments. Charging an additional amount on top of your service fees is a great incentive for clients to pay up and on time. You can charge a flat fee (i.e. $25 for payments up to five days late) or a percentage of the total invoice (5% of the total for payments up to seven days late, and 7.5% for payments after that). The amount doesn’t have to be huge — this is meant to be a small penalty (and a huge incentive) for clients to stay on top of your payment schedule.
As a subtle reminder of payment dates and late fees, also consider including those terms in the footer of each invoice.
If you don’t already have a skeletal contract to work from, The Balance offers several great contract templates to use.
Request a deposit/retainer
Freelancers and entrepreneurs can also ask for partial payment upfront. It’s common to ask clients for a deposit before beginning work and then invoice for the remainder once the project is complete.
For example, wedding photographers often require a nonrefundable retainer for approximately 30% of the service price to “hold the date” of the event. This ensures a photographer won’t double book themselves, and also offers partial payment that covers some of the prep work photographers do prior to their client’s big day.
Automate invoices and payment reminders
If you have an ongoing relationship with a client, use an invoicing platform to automate your invoices. Setting up recurring invoices saves both you and your client time (no need to manually create all those duplicate invoices every month).
Just put your client’s credit card information into your invoicing tool, and it will charge your client automatically on a specified date.
Instead of automating recurring invoices, you can also set up automatic emails to gently remind clients about upcoming or late payments. Draft up your email and schedule it to send to clients three to five days before their payment is due and/or three to five days after the due date. While this may feel like overkill at first, we’ve all had clients who were notorious for late payments. These emails not only help you get paid faster, but they also save clients cash by helping them avoid late fees.
What to do when a client won’t pay up
In spite of your best efforts, sometimes clients are wildly late—or they don’t pay at all. According to one survey from the Freelancer Club, freelancers said they worked an average of 31 days unpaid over the previous two years. That breaks down to about three work weeks of unpaid labour every year, and few entrepreneurs can afford that.
The Freelancers Union also reports that 44% of their members have issues getting paid. They carry an average of over $10,000 in unpaid invoices, which is the equivalent of 36 hours of work just to track down each missing payment.
And while this is a burden many entrepreneurs carry, there are some strategies to help you collect on those unpaid invoices.
Send a final notice letter
If you’ve sent multiple emails to remind your client of their past-due invoice to no avail, then it may be time to kick your communications up a notch.
If your invoices and payment requests are ignored, the Freelancers Union suggests sending your deadbeat client a certified letter. In the letter, highlight your agreed-upon payment terms and what their financial obligations are. Reiterate what is owed and set a clear deadline for payment. To really emphasize that you mean business, get a lawyer to co-sign the letter.
Settle with a mutual release
If you’re ready to simply move past your non-payment nightmare, freelancers have another option: settling.
Essentially, you’d draft up a document called a mutual release. In this document, you outline the terms of your settlement—or a one-time discount to help you recover some of that bad debt and wipe the slate clean. Make sure you get the discounted amount and agreed-upon payment deadline in writing.
Retain a collections agency
Sometimes it takes an authoritative third-party to collect on those unpaid invoices, which is where a collections agency can help.
Typically if you have a contract in place proving you had a work agreement and the client hasn’t disputed the payment owed, then you can pass that debt onto a collections agency. These agencies specialize in recovering cash from parties responsible for delinquent payments, so they may be successful where you weren’t.
For more information on finding and hiring a collections agency, check out this piece from Business News Daily.
Take clients to small claims court
If you’ve exhausted all your other options, freelancers and entrepreneurs can consider litigation. Sometimes the threat of going to small claims court is enough to scare delinquent clients into paying up.
While small claims court is a viable option, legal fees can start piling up and even if you win, sometimes it can still be difficult to collect on unpaid debts.
If small claims court is an option you want to explore, go through the Freelancers Union checklist to make sure your case is ready to review.
Moving forward with faster payments
Now that you have a firm grasp on some strategies to help you get paid faster (or recover past-due payments), you can prevent your future cash flow from taking a hit. With a little upfront work and getting everything in writing, you can help ensure you’re on track for faster payments.
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.