Deposit Required? When to Ask Customers to Pay Upfront

When should you require a deposit?

Many businesses require payment in full before you can enjoy their products or services:

• At a fast-food restaurant, you pay at the first drive-thru window and get your food at the second.
• At a movie theater, you buy your ticket and then take your seat.
• When you shop at the supermarket, you can’t leave with your chosen products until you pay the cashier.
• When you order something on Amazon, your account gets charged before the order is shipped.

Things get more complicated when you’re selling intangible goods and services. But even so, many service businesses don’t require upfront payments or deposits: 

• A landscaper doesn’t require payment or a deposit before cutting your grass. 
• A chiropractor doesn’t require payment or a deposit before performing adjustments.
• Mechanics don’t invoice you before fixing your car.

It’s up to you to decide if an upfront payment or deposit is appropriate for the service you provide. Here are four questions to ask when determining where you fall on the payment spectrum. 

1. Do you have something of value that belongs to the customer?

Whether you have collateral will affect your decision to require a deposit or upfront payment. If you hold the customer’s property as collateral, you don’t need to charge upfront for your services or ask for a deposit.

Consider the businesses and service providers that don’t require an upfront payment. Most have recourse to ensure they’re paid. For example:

• Mechanics: A mechanic shop has the customer’s car in its possession. If the customer doesn’t pay, they won’t get their car back. Their car is worth more than the services performed. 
• Jewelry repair: The same tenet applies to jewelry repair. If the customer doesn’t pay, they won’t get their item back. 

2. Is it easy for you to demand the money you’re owed? 

Whether you have recourse when asking for payment will help determine if you should require a deposit or upfront payment. When you have recourse, you don’t need to secure payment. For example: 

• Landscapers: A landscaper is physically on the client’s property; they can refuse to leave until they’re paid. They know where their clients live and can return until they receive payment. They can even put a lien on a client’s home for non-payment. 
• Chiropractors: Chiropractors have their clients’ information and paperwork to back up their payment claims. They have plenty of recourse if someone refuses to pay.

However, freelancers, small business owners and contractors dealing in intangible goods don’t always have recourse. For example: 

• Designers: Say you own a design business and your primary income source is creating logos and brand images for clients. What happens if your client refuses to pay or asks for endless revisions? You could keep the files and refuse to remove the watermark from previously sent proofs, but you’ve already put in hours of work. Taking the client to court would cost you more than it’s worth. You’re out of luck.

If you don’t have significant leverage to demand the money the client owes you, you should consider getting paid upfront.

3. Is the product or service custom-made?

It makes sense to require a deposit or upfront payment for custom products and services.

Let’s say you have a sign shop and a customer orders a sign with its logo to help market a retail store. This sign must be unique and customized. However, custom-made orders present the following risks to your business: 

• You must put time and effort into that specific project to create the custom offering. 
• If the client refuses to pay, you can’t resell that custom piece to someone else. 

In this situation, asking for payment before investing time and resources into creating the custom offering makes sense.

4. Is this a long-term project? 

If you are working on a project that will take weeks or months to complete, it makes sense to get payment initially so you’re not scraping by while working on it. In this kind of job, you may want to consider charging either a monthly retainer or milestone payment’s. 

6 tips for collecting upfront payments

If you’ve never done it before, asking for payment upfront might feel strange. Here are six helpful tips to assist you in getting favorable results.

1. Prove yourself before asking for an upfront payment.

Clients don’t want to get duped out of their money. If you have an unprofessional website, no internet presence and no good customer reviews, it’s doubtful they’ll pay upfront. 

To present yourself as a trustworthy vendor and brand, produce testimonials and case studies, collect referrals and bolster your web presence to create an engaging website.

2. Give incentives for upfront payments and deposits.

People respond to positive and negative reinforcement. Understanding this, you may benefit from offering a slight discount for early payment or charging a penalty for late payment.

3. Get on the phone to establish trust.

In today’s business world, it’s not uncommon for the entirety of a relationship to take place over email. While email is often convenient, picking up the phone or meeting with a client in person can be very beneficial, particularly if you have an unresponsive client. It establishes trust and makes customers feel more at ease when parting with their money.

4. Set payment expectations. 

In your initial conversations, explain your payment terms to potential clients. You can also explain that this helps you cut down on paperwork so you can concentrate on the work at hand. 

When clients understand payment expectations and choose to do business with you under those terms, you’ll have an easier time collecting upfront payments and deposits. 

5. Put upfront payments in writing and get client sign-off. 

Presenting business proposals and client contracts is an excellent idea, especially when selling a service. Proposals and contracts describe the work’s scope, costs and payment terms so there’s no confusion later. Getting the client to agree to this by signing off on the contract provides you with a legal document you can use in court if necessary.

6. Consider asking for a partial deposit.

If potential clients balk at paying 100 percent upfront, ask for a 50 percent deposit. You can also arrange milestone payments triggered after completing specific deliverables to give new clients peace of mind. 

However, including terms with a milestone or deposit payment structure is advisable. For example, you might increase the overall price to account for the added risk. Alternatively, you could say the deposit pays up until a specific point in the process, after which the remainder is due. 

Pros and cons of requiring a deposit

Asking for money upfront isn’t for everyone and doesn’t work in every situation. Here are some pros and cons to consider.

Pros of asking for a deposit or upfront payment include:

• You are guaranteed payment. 
• You receive the money you need to invest in materials without impacting your existing cash reserves.
• It improves cash flow.
• You won’t have any costs, time or effort associated with collection activities.
• You’ll have less anxiety and stress about whether you can trust a new client.

Cons of asking for a deposit or upfront payment include:

• It increases the chance that a prospect will go with a competitor (unless upfront payment is standard in the industry).
• It may cause tension or communication issues between you and the client initially. 
• You might need to pay for unexpected expenses or increased time and effort associated with completing the job ― without being able to go back to the client to make up the difference.

Larry Alton contributed to this article.