As a freelancer or small business, maintaining a positive cashflow is crucial if you want to stay in business. Late payments are a business killer and long payment terms are nearly as bad.
I work with individuals, small businesses and startups. One of the things I like most about working with clients that fall into these groups is that I’m usually working closely with the business owner. It’s fantastic to feel the buzz of excitement from the stakeholders, especially when the project goes live.
From a business point of view, one of the benefits is that my clients don’t tend to have large finance departments and all the bureaucracy that comes with them. As a result, and because it’s easy to quickly pay invoices these days, my payment terms are seven days from receipt.
Occasionally, a new client will ask me to extend these terms as they haven’t come across them before. I’ve written this post to explain how I settled on seven days and why they’re shorter than the traditional business terms.
Where it all began
Back in September 2009, Simon Campbell of Erskine Design wrote an insightful post detailing the history of 30-day payment terms. The blog may be confined to the web archive, but it makes for fascinating reading if you’ve ever wondered how net-30/60/90 payment terms came about:
The net-30 day term concept came from the days where invoices were sent by post, arriving at the client’s post room then moved internally to the finance department.
Once there they would be sent up to the department who initiated the work and signed off by the project leader then to be sent down to finance again.
Here, the poor invoice languished in one of many in-trays, until entered into the purchase ledger by rows of hapless clerks with quill pens.
They would then be scheduled for the ubiquitous ‘check run’ where the head of finance would go though the ledger, sign the cheque, then send it up to the Finance Director to countersign.This boring, but extremely valuable, slip of paper was put in an envelope and sent down to the post room where it was posted, second class (remember we are talking about accounts departments here), where the supplier receives it in its own post room two days later.
The post room then sends said cheque down to the finance department where it is entered into the sales ledger, collated into the daily takings through the bank paying in book.
Another hapless soul takes the cheques to the bank.
The bank then processes the cheque and three days later, bingo! The money is finally credited to the suppliers account. Tremendous.
Credit: Simon Campbell/Erskine Design. Thanks to Andy Clarke for highlighting this on Unfinished Business.
It makes a compelling case for the necessity of 30-day terms when payments were based on invoices and cheques sent through the post and manually passed through multiple departments.
Fast-forward to 2019 and it’s hard to justify these archaic payment terms with the number of near-instant payment options available. Payment on receipt may not always be possible, but seven days seems reasonable.
The long wait
When freelancers accept long payment terms, they become credit providers to their clients, hoping that at the end of the 30/60/90-day period the client will still be in good standing to settle the debt.
This is not intended to be flippant. If giants like Carillion can fall (with their 120-day payment terms), freelancers have to be careful in offering credit to clients of all sizes.
Alternative payment terms
In the design industry, it’s common to require a commencement deposit before work begins and release of the final balance before files are handed over. This is widely considered to be fair for all parties and, in my experience, generally results in prompt payment.
For other types of work where this may be impractical, my contract specifies seven-day payment terms. I’d encourage other freelancers and small businesses to do the same, whatever industry they’re in.
Where there’s no avoiding long payment terms, perhaps due to a juggernaut of a finance department, I ask about billing on a weekly basis. This means I only wait for that payment period once before starting to receive a weekly income.
A win-win
For clients, offering or accepting shorter payment terms has a couple of immediate benefits. Firstly, the freelancers that you want to work with are more likely to want to work with you. For some freelancers, 30+ day payment terms are simply unaffordable and for others they’re a red flag.
Secondly, if the freelancer isn’t worried about cashflow, they’re likely to produce better work. Long payment terms and late payments can have a significant impact on a freelancer’s cashflow and, ultimately, their stress levels. Shorter terms mean the freelancer is less likely to be worrying about money, and can spend more time focussing on your project.
Finally, and perhaps most importantly, shorter payment terms also help to ensure a freelancer will be around in future. Perhaps for an update to the current work or a new project. What’s not to like?
Originally posted on Work Notes.
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