New, large contracts are every small business’ dream. Yet they can turn into a nightmare if the customer is a slow payer – or even worse, a non-payer. In fact, nearly 75% of self-employed people state that a customer has defaulted at some point in their career, so this is the norm rather than the exception. So what can you do to ensure you get paid for the work you do and avoid cash flow problems?
1. Ask for upfront payment
Some customers may be reluctant to pay you in advance, but this is relatively common in a number of sectors. Full or part payment upfront ensures you won’t be working for nothing and safeguards you against the possibility of the customer going bankrupt. If you need to purchase raw materials to complete the project, you can ask for payment in advance for those costs too.
2. Institute progress billing
When you adopt progress billing, you incrementally invoice customers at each stage of the project instead of sending a single bill at the end. Each invoice should list the total value of the project, the balance paid to date, the percentage of activity completed, the amount currently outstanding and the sum immediately due.
3. Get a formal contract
In the excitement of taking on a new customer, many small businesses and freelancers rely on a verbal agreement of charges and terms of payments. This approach will work fine – until things go wrong, and then you can enter into the beginnings of cash flow problems. Try to get everything in writing, including your hourly rate, the number of hours expected to complete the contract, the payment deadlines and the billing stages.
4 Ask other suppliers’ opinions
Whenever possible, you should speak to other people who have done business with the company. Their experiences – positive or negative – will give you a good idea of how the company behaves, how you are likely to be treated – and whether you are likely to be paid on time or if at all. If you don’t have suitable contacts, you can ask the customer to provide them.
5. Conduct a credit check
Examining a company’s business credit report is an excellent way to assess its financial position, if they are experiencing cash flow problems, and hence the likelihood of getting paid. You do not require the customer’s permission to check its score and it will only take you a few minutes, which could prove time very well spent. In particular, you should consider whether there is a reported history of late payments, court judgments or large and potentially unserviceable debts – or whether the firm has little or no credit history, which can also be a warning sign.
Written by Carl Faulds, Managing Director of Cashsolv.