Today, I have a very valuable business lesson I would like to share with you. It’s all about ensuring you get paid.
Just after I set my business up in 1995, I spoke with a business owner who had recently gone bankrupt. Steven had owned a garage, which offered a very high class service to people who owned expensive vehicles and valued excellence. I asked him what went wrong.
Here’s his story and the lesson.
Gentleman’s agreement?
Steven explained that he had been ripped off, by a much bigger company he had partnered with. They decided not to pay a very large bill they had run up and gave him almost no notice. His business couldn’t cope with the impact it made to his cash flow and within 2 months, he was broke. Apparently, he believed that they would pay him as they promised, ‘if he just did one more job’ for them.
Anyhow, the reason I am sharing this story with you, is that this likeable, hardworking man offered me some great advice, which I am going to share with you. Here’s what Steven told me:
Jim, make sure you never enter into a gentleman’s agreement, where you are the only gentleman.
Wise words, but I still had to learn the hard way!
Back when Steven gave me this advice, I was in my late 20′s and new to running a business. I thought the advice was just a clever play on words. I then discovered there was a massively valuable lesson behind those wise words. In 1998, I found myself licking my wounds after a client of mine went missing, owing me over £30,000! He’d verbally agreed to pay me, I did the work over a period of 3 months, he made a ton of money and that was the last I saw of him. Had I not been financially strong, it would have wiped my business out.
Limiting your exposure to debt
As a small business owner, you have to be extremely careful who you choose to work with. You also need some rules in place, to limit your exposure and protect your business. Some people will deliberately tell you one thing and do something else. In my experience, those people are a tiny minority. In most cases, people will intend to pay you but find they can’t, because they have become victims of someone who has not paid them.
By having some sensible rules in place regarding your payment terms and sticking to them, you may lose the occasional client, who needs greater flexibility because they have cash flow issues. However, without some kind of protection in place, you leave yourself extremely exposed.
Over to you
Do you have any advice for small business owners, to help them limit their exposure to non-payment? If so, please share it with a comment.
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You hit the nail on the head here.
As a designer, I always ask for 30% of the fee in advance. The only people who say no are people who were going to mess me around with payment. As such it loses me nothing and helps me stay in good financial shape.
Thanks Jim.
Hi there Charlie. Stage payments are a very good idea and widely used in many professions. Thanks for the feedback.
We’re the same Charlie. We request 50% in advance and set limits on what we will extend ourselves to.
Works great.
This is important stuff.
I got done over by a customer who seriously let us down and hit the family businesses really hard. We took an extra person on to handle all the work they were giving us, then they got later and later paying for bigger and bigger projects. They went under and owed me over $60k.
Hi Bal. That’s quite some hot you guys took here. Thanks for sharing your experience.
I got stiffed last fall for $1100 on a video project that fell apart… Not a lot of money, necessarily, but that’s the last “Gentleman’s agreement” I’ll enter into. Seems like everyone (myself included) has a “story” of how we didn’t get paid… The trick is to make sure we learn from the experience, and make sure it’s only ONE story…
For me, the lesson is: Contracts. Doesn’t have to be anything complicated, just a basic written agreement — Here’s what I’ll do. Here’s how much you agree to pay. Here are the due dates for the work and the payment. Signed by both parties, it’s enough to establish a paper trail should things go south. Plus, as you guys mention above, stage payments are a pretty important part of that agreement… Depending on the size and scope of the project, I may do a 50/50 deposit/balance, or sometimes a 30/30/40… But especially with new clients, there’s always an up-front fee… “Your deposit is my cue to start work.”
Rock on, Jim… Thanks.
Some very good advice there, Brett. Especially, learning from the experience and stopping it from happening again.
Thanks for the feedback.
Brett
Some very good points.
Some time ago we introduced a policy that we would only accept first time customers on a Pro Forma Invoice basis, until they had built up a payment record that we were happy with and then they go onto “STRICT” 30 days payment. If they default only once on the 30 days they go straight back onto Pro Forma ad infinitum.
We get a very small percentage of first timers who will not pay up front, but they were proably not going to pay us anyway. Of those who default on the 30 days, most stick with us on Pro Forma and those that don’t can go else where and get a free 30 day loan from another company.
OK! so we loose a few bad payers but our cash flow is great..
Hi Llewellyn. You make a great point at the end. If you lose a bad payer, you really don’t lose much.
Bad payers are something no business needs.
Thanks for the feedback.
I think I’ve only got stiffed like $30 in my “career” but I have let people talk me into lower pricing, which is another lesson to learn. Stick to your pricing! Some people are just kinda cheap
Hi Corey. Some people certainly are a little cheap. Thanks for sharing.
A good advise for a newbie business owner. I got into trouble like that too when I first started to work online.
Thanks, Alex.
I’d also say to not even pay attention to them until the deposit comes in. It is one thing to do some of the work and keep it internal to your design company. It is another to not even create a single file or page template until the check/CC payment is in hand. Make it a company policy to not even create a project folder for them until deposit is make.
Thanks for the feedback, Patrick.