When you get paid should determine how much you charge.
Getting a dollar today is not the same as getting a dollar next month. Getting a dollar six weeks from now is like getting 75 cents, just because it’s irritating. (And, maybe because you had to use your VISA for the electric bill in the meantime.)
Sometimes we get to decide when we get paid. Those are good and satisfying days.
But often, client usually tells us when they will pay. And we are pretty much stuck with it. Especially when they are big companies or frequent buyers of our stuff. (So, we price accordingly.)
The general rule is: Get paid sooner rather than later. (Duh.)
And the longer the wait for the money, the bigger the fee must be. This is a law of nature, mind you, and perhaps a law of physics as well.
So before we quote something for a new client, before we send a proposal to someone we haven’t worked with before, let’s find out what timescale we’re working on. Is this geologic time? Glacial? NASCAR?
Early in the conversation, probably by email, we do this. As if it is the most natural thing in the world.
George:
I’ll be happy to work out a budget for you.
Just for reference. On projects like these, only half the fee is due when we start. The rest can be settled once your work is delivered and approved.
Is that okay with you? Let me know.
Yes. We start with the terms most favorable to us. Why not? This way, the client might say, “Sure, that’s fine.” Or they’ll have to say “Um, well, our company policy is to pay in invoices in XX days. And I can’t change that.” They have to say “Do the work now, we’ll pay for it whenever.”
You can vary this, of course.
Just for reference. On projects like these, the fee isn’t due until ten days after the project is delivered.
I trust that is okay with you. Let me know.
Yeah, this puts the burden on the client to talk about their payment processes. Which are almost never flattering. They look like the pikers.
But their answers will tell you how to price this client.
“Sure, half in advance is fine. And half on delivery.”
The terms are good. The freelancer’s optimum. Use your base price. Say $1000.
“Um. . . I really have no way to do an advance payment, but we can probably settle this within ten days.”
Okay. I’m thinking 1130 now. Because 10 days is almost never 10 days, actually. There are a lot of smaller companies here. Maybe some big companies with special arrangements for contractors and freelancers. Maybe.
“Well we customarily pay freelancers within 30 days.”
Ah. This 1000 becomes 1250. Just because. This is big-company baloney. Maybe universities. Some government agencies.
“Sorry. The company pays in 45 days. I really have no say about that.”
The ultimate suckage. We’re looking at 1425. Or more. This 45-day thing has been the bane of my career. Oddly, it’s the companies with the MOST money who delay the longest.
A $9 billion corporation getting free credit for 45 days, from me a lone freelancer. Sheesh.
So, we quote way up the ladder. $1425. 45 days is an eternity. We can breed chickens in 45 days. We charge like hell.
If we have to wait for checks, might as well wait for bigger ones.
Walt,
Lately I’ve been writing a bunch of demand generation pieces for a commercial bank (white papers, emails, landing pages, etc.), and a lot of the focus is how to improve cash flow. What do you think they recommend? Pay as late as possible. And purchase with a credit card that offers rebates.
Rob
Yes. But pay that credit card late, and they get mad.
They don’t get mad, they charge interest.
Good point, which raises the next question. How do you approach late payers? Do you recommend penalties?
Which happens to be exactly what Mr. Kania points out: If we give our customers credit, we should charge interest. Duh. You read that a lot in freelancer guides. Mr. Kania is the first to give me some hints about how to do it. Thanks for this – and quite a lot of your other articles! Every book on the subject out there should contain way more direct speech examples.
Are you replying to me, Christopher? Walt is not saying you should charge interest as a penalty for late payment — just charge more up front if you are forced into payment schedule terms you dislike. I’m asking about late payments — suppose they’ve gone over the agreed to 45 day schedule. You can’t charge interest at that point, unfortunately.
The best answer I have is to impose a flat penalty fee or a percentage of the balance due in the hope that it gets attention as a slap on the wrist, which you may or may not actually collect. I’ve never heard of freelancers or small firms making such penalties cumulative, which would be similar to charging interest. Probably the key is — as Walt suggests — to focus on setting the right price up front and screening clients so you don’t get deadbeats. Yet there is that frustrating corporate client who you know will pay, but possibly very, very later. I’m more interested in figuring out how to change that behavior rather than penalizing them after the fact.
YOU are awesome! lol that is exactly what I was thinking and I thought I was being a jerk about it! Thank you for reading my mind!!!
Eduardo, no one’s being a jerk about it when they expect to be paid in a reasonable amount of time; say, net 30. On the other hand, companies that take 90 days to pay are jerks.
Net 30 is my agreement with the agency of that commercial bank client I was referring to. The one I’ve been writing demand generation pieces on how to improve working capital. However, they routinely pay me 15 days after I email them my invoice. They could wait longer to pay me and improve their cash flow, but they know paying me early makes me happy. And making me happy makes me want to do things for them. Like move their projects to the head of my cue. Or shower them with bonus ideas.
So paying as late as possible, even to agreed upon terms, can have its downside. But it never pays to be a jerk.
Hello Dan,
I had the impression that charging a percentage above normal for extended payment periods is just like saying: “I give you credit equal to the invoice’s amount of $1000 for 45 days at an interest rate of 25% p.a., thus you owe me $1031,25 (1000×0.25÷12×1.5), payable immediately after expiry.” You are right, though, in that the bank’s interest generates compound interest, which we freelancers would not normally calculate.
As for your question: Here in Germany, the law states that all invoices are to be paid under 30 days, after which the client is automatically in default. A widespread custom and standard clause of German contracts, then, is to charge 5% over the base interest rate for those in default, and you can immediately hand the outstanding debt over to a court, which will usually hand it to the bailiff without further ado if the client can not prove that he doesn’t need to pay (breach of contract or something like that).
Ach! Wir sind so unzivilisiert hier im Wilden Westen.
Ach! Wir sind so überreguliert hier im Alten Europa! ;D
Seriously, I can only talk about how we handle it over here. I wasn’t patronizing at all! Would a paragraph in your TOS that defined interest rates for clients at default be a K.O. criterion in the U.S.?
I didn’t think you were being patronizing. We are so *underregulated* in this area and composed of so many different, far-flung jurisdictions that it is virtually impossible for a small business or freelancer to collect debts, let alone impose serious penalties on deadbeats — unless the deadbeats are even smaller entities in the same state.
I’m sure you can set things up contractually so that you have an iron-clad claim on interest for late payments or any other penalty you want to impose, but taking it to court becomes prohibitively difficult and expensive just to recover relatively small amounts. If you can do it yourself in your own state or a nearby jurisidiction, it may be worth it to do so, but deadbeat clients in distant states can only be brought to heel by retaining a lawyer in their jurisdiction. There are plenty of relatively cheap but sketchy collection agencies you might use, but most of what they do is just harassment by phone and mail. For a collections agency to actually sue the client on your behalf will cost at least 30% of the amount recovered, and they have no motivation to do this for relatively small debts.
Brilliant stuff! I was thinking about this the other day and even drafted an email to this effect to a client. Colleagues thought I was unlikely to see any success with such an approach, but your post certainly confirms that the approach is certainly logical and fair! Payment SHOULD bear a relation to how quickly we are paid, and therefore how much stress waiting for that payment causes.
There is, incidentally, EU legislation that seems to back this up – unless contractually agreed otherwise, we can expect to be paid within 30 days, and late payments are subject to a 40 EUR fixed penalty plus 8% of the invoice value. Indeed, it probably does not go far enough.
For the record, the average, industrially worthless male chick is born and exterminated within a 24-hour turnaround. Wouldn’t it be nice if payments were as prompt?