If you freelance or own a small consultancy, you’ve probably experienced at least a few sleepless nights worrying about money: when to invoice, and whether (and when) a client will pay. After all, for skilled workers that essentially sell their time, the job is never really done until the money is in the bank.
There’s a tiered way of thinking about this stress. I’ve experienced the full range.
Old as Time
Why is getting paid so difficult — especially for freelancers and consultants?
The problem isn’t a new one, and because it’s so persistent, it’s spawned complex financial products and services: invoice futures markets, client escrow accounts, cash flow loans. But these are just a bandage; they don’t address root cause. Why is it so hard getting paid?
As a founder of a software consultancy and former freelance engineer, I know how frustrating it can be to not receive a check after you’ve done good work. Sometimes, your client is an outright fraud — someone out to dupe and rob you. But most of the time, it’s not about dishonesty. As I’ve seen, your chances of getting paid depend on these four variables:
Personality: As Crazy as Dating
Trust and prior working experience are key in any good client / freelancer relationship. You’re best off doing business with good people. Think about these universal adages. Pick your co-founders wisely. Be careful about raising money from friends and family. Think twice before hiring your best friend. This same advice applies not just to those you work with — but also the people you sell to.
Still, you may need to do business with a difficult client. It’s one thing to say you wouldn’t work with someone you don’t like. But when you have fixed costs like payroll and rent, the bills add up. That ‘difficult’ client may be quick to write you a check. So you work with them.
Of course, there is no crystal ball that allows you to predict who will be easy or difficult. But, if there’s one red flag we always pay attention to, it’s this: if a client is difficult in contract negotiation, they’ll likely be a difficult client too. The best clients are those that negotiate little, sign, and move on. The worst are those who spend weeks insisting on items like net 45 payment terms, or want to remove a limitation of liability clause. It may not be the person you are working with but rather their procurement department. Either way, if they’re serious about doing business, they’ll work to get through the contracts quickly with you.
Company DNA: It’s not you, or them. It’s the business.
Sometimes, a business’s DNA can be an indicator of smooth sailing ahead, particularly when it comes to payments. For example, SaaS startups get paid by the month, and that consistent cash flow can make them a better payment prospect than a service company. Keep in mind that a client’s cash flow affects yours; they could pay their invoice late as they wait for funding, wrap up an expensive lawsuit, or switch billing systems.
Black Swan Events: Focus On What You Can Control
And…the unexpected can happen too. Ever hear of the Bus Factor? It’s a real thing. There are an infinite number of unanticipated reasons that you might not get paid (company runs out of funding, founder breakup, company wind down), and you’ll drive yourself crazy trying to predict what could go wrong with each client. It’s better to move on. When you do, focus on what you can control — like your contract.
Contract Structure: The Details Matter
If your contract is set up favorably from the start, you’ll be in a great position throughout the project.
Are you billing for your time in hourly, daily or weekly increments? Or do you bill by project milestone, with a fixed end cost? The payment terms should definitely be part of your contract; if your client doesn’t know, then whatever bill you send will be a surprise to them and they might try to negotiate.
Regardless of your billing structure, did you put in the contract how you would actually get paid? Check, bank wire, credit card, or BTC transfer? That was one of the first mistakes I made, and the client insisted on mail checks that mysteriously took between 2 and 3 extra weeks to arrive after they were sent.
The lesson here is that by explicitly writing down how you bill for your time and how you are expected to get paid, you remove the headache of having that discussion down the road where there is an opportunity for the client to gain leverage.
Contract Structure is likely where you have the most flexibility as a freelancer or small consultancy to arrange a well structured deal. Over the years we’ve learned some lessons negotiating and structuring ours, so we decided to publish a checklist with tips on how to help others when getting started.
1. Project Deposit
Always ask for a non-refundable project deposit. To me, this is non-negotiable. Asking for a project deposit serves a few purposes:
A) It weeds out non serious clients. Have you ever worked with someone who was “eager to get started ASAP” and “needs the project done yesterday?” If they really are eager, see how eager they are to send a wire deposit. The non-BS clients send that wire ASAP.
B) It proves that the client has money to pay for your services.
C) It gives you protection if the project is a false start.
D) It helps you plan your team and resources. You can block of dates and times on your calendar, and this brings a sense of clarity to scheduling work. If a client bails for any reason, you’re still getting paid for that time. Even better if you can fill new work in for that period, too.
2. Ask for Short Payment Terms
Most small business think that there’s no way around this. If you work with a big company, payment terms can be anywhere from net 45 to 90. Don’t settle for anything past net 45. Terms longer than this are absurd. If you are working with respectable people or a good company, they will have already set aside a budget rather than relying on money they don’t have.
3. Payment Reminders
It’s not enough sometimes to just send an invoice. My company often sends reminders 5 to 7 days before an invoice is due; our clients are great at respecting this, as it keeps the momentum of a project and holds both sides accountable. It feels really, really bad when sending an invoice reminder when you’re late on a deliverable, so it requires you to be punctual with your responsibilities, too. (As someone who also receives invoices, reminders can also get annoying if done too often, so use with caution.)
4. Early Payment Discounts
Why not reward your client for paying early? Offer a 1 to 5% discount on invoices where there’s a long wait or in times where cash is dear to you. You never know the flipside, where the client may really need that extra 5% and would send the bill ASAP.
5. Interest on Late Invoices
You can also have your invoices accrue interest, if late. It’s normal to charge 1 to 2% compounding over time for each 30 days it’s late. My company has never actually enforced this, but we know we can use it as leverage if we need to. Overall, it’s a nice formality to have — and a reminder to your client that a serious delay will have a negative financial consequence, if enforced.
6. Confirmation Receiving the Invoice
We once had a client not pay a $30,000 bill. That hurt. We would not have made that mistake had we simply waited before transferring the code and asked “Would you mind confirming you received our invoice?”
Another clause we’re proud to have never enforced relates to Intellectual Property ownership. By default, our clients own all of the code we write for them…assuming they pay in full. Structure your contracts so that you own all of the IP until invoices are settled.
8. Weeks, not Hours
Ask that your clients pay you by the week, not by the hour. Shifting from hourly to weekly billing has been one of the single best decisions our business has made. It allows us to fully dedicate engineers and designers to one project at a time, and reduces transition time between projects.
9. Client Meeting Requirements
Have you ever had a client who canceled two or even four weekly meetings in a row, didn’t respond to emails, then got upset when the product missed deadlines or expectations? Consider requiring minimum meeting time and frequency to ensure you’ll hit the mark. At my company, we think it’s best to meet with our clients for a 1.5 hour meeting every week to discuss past and upcoming work.
10. Pause Work
When an invoice becomes late past a respectable grace period, have in your contract that you’re allowed to pause work until the invoice is settled.
When Do You Make Exceptions?
I’ve been asked a lot: when do you make an exception if a client asks you to defer an invoice, discount payment, or write-off the charge?
There’s no right answer. We start by asking ourselves how long we’ve been working with the client and how much we trust them. Mostly, we’ve been right, and the clients we’ve deferred payments to a later date haven’t just made up their payments, they’ve referred new work to us — and increased their commitment. It pays to trust people sometimes.
If you encounter frequent invoicing issues, it might be time to reevaluate your process though. If you focus on your work, the results (getting paid) should take care of themselves.
Trust, Action, and A Little Luck
Trust is great. Luck helps, too. But as a freelancer or business owner, there are definitely a few things you can do to increase the chances you’ll get paid — consistently and on time.
Observe carefully, trust your instincts, and work with people who respect you — and show you how much they care with action. And once you identify those people, consider doubling down in your partnerships with them for the years to come.
If you liked this story, follow me on Twitter for more.