Why Trust is Good, But Money up Front is Better by Natascha Thomson

Natascha w Hat 2012_12_13I am currently trying to take a client to small claims court. This is much more complicated than I envisioned.  And the outcome is uncertain. But let me begin at the start, so you can avoid my mistakes.

The Honeymoon Phase
Like probably most new business owners, I entered into my marketing consulting practice with trust and naiveté.

There are a lot of administrative things to figure out: how much to charge a client, legal contracts, templates, billing etc.  And then there is also the part where you define your mission and, in my case, place much faith in the human race, because you believe in integrity and honesty.

Reality
I was very lucky with my first few clients who I all knew personally before I started working with them. They all paid on time.

Then a client came as a referral from an old colleague. The rule of thumb is that referrals from people you know are good referrals. But my gut feeling was to turn the project down, as I had little rapport with the client, but I told myself that I had to build my business and could not afford to say no.

What they did not tell you at St. Mary’s Business School….
I don’t want to disclose any details of my work with this client other than that I got positive feedback along the way and we both considered the project outcome a success. The final words were “the check is in the mail”.

After the check did not arrive, an agonizing period started where the client admitted to be unable to pay, asking me to put him on a payment plan. It was very upsetting.

My wake up call came after talking to my accountant and self-employed friends: it turned out that almost everybody I knew had lost money to non-paying clients (this was a very long trail on Facebook). Trying to collect the money can take so much time, effort, and money – and there are no guarantees for success- that many people just write the owed money off. Ouch!

After receiving this feedback, I accepted the client’s payment plan and received the first payment; already a few days late. That was the last payment I received.

The Odds
Unfortunately, after reminding the delinquent client one more time, I see no other avenue but to go to small claims court:

  • If I can figure out where to file the claim (if I get it wrong, case is dismissed)
  • If I can serve the defendant the court notice (somebody else but me has to do this in person and I have to pay; it means one has to track down the person)
  • If I win the case
  • If I can actually collect my money (after I win)

Lesson Learned
The lesson I have learned is to always ask for enough money up front to cover myself until “pay day”.

What I mean by that is, cover yourself (at a minimum) up to the time your first payment is due. Example: you bill every 30 days and your client has 30 days to pay you.  Ask for enough money in advance to cover you for 60 days of work. If the check does not arrive on day 60, you can stop the project but haven’t made a loss. Of course, they could not pay you in the future but at this point, you have at least established some trust.

Having said that, it seems common to ask for anything from a minimum of 20% to 40% (sometimes even more) up front, especially if you charge on a project basis.

If the client refuses: walk way!
To be continued…

ABOUT the AUTHOR: Natascha Thomson is the Owner & Founder of MarketingXLerator – a B2B Social Media Marketing Consultancy – with a focus on using social media to connect people for business impact. She is also a co-author of the book 42 Rules for B2B Social Media Marketing.

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Posted in Author, Business Ownership, Life Experience.

4 Comments

  1. Thanks for sharing your story, Natascha! I think we have to share the risk with our clients. They are trusting us to deliver results that they desperately need for their business, and we are trusting them to work with us in good faith and pay us fairly. I usually ask for payment throughout the delivery cycle if I’m dealing with a new relationship.

    I don’t want the minority of people who can’t or won’t pay their bills to heavily influence how I deal with the majority of people who do. My solution has been to put a statement at the bottom of all of my invoices that says “If you’re not delighted with anything for which you’ve been billed, just cross out the amount and pay the lesser amount.” No one has ever paid me less than what I’ve billed.

    Don’t turn to the dark side! Most experiences in our consulting work are positive! Don’t let a few negative experiences ruin your positive outlook.

  2. As one who hires vendors, I make a habit of offering 25% to 50% up front if there’s a lot of preparation required before delivery. This serves another purpose besides just showing the client can pay, and helping you with cashflow – if the customer has paid you a signficant down payment for services, they will want their value. They will make it a priority to help you receive this value, not ignore you because of other pressing concerns.

  3. Another wrinkle I forgot to mention. If you are working on a time and materials basis, ask for a retainer upfront – 2 weeks worth of work, or however long their billing and payment cycle is. They can work this down or you refund accordingly upon the end of a work agreement, but this is fair equalization where a big customer with slow pay cycles is working with small contractor.

    • Greg:

      thanks for those great tips! You are right, getting the commitment from the client to the project is key and not always easy.

      I start to feel more and more that I really add value, and hence, should not be afraid to ask for what my work is worth. Took a while :-).

      Kim, thanks for your comment also.

      Appreciate your support,

      Natascha

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