Your Contract Attorney

Solving the Payment Problem

Added on by Gamal Hennessy.

By Gamal Hennessy

As a freelance professional or a small business owner, getting paid on time can be the difference between surviving for another month and financial disaster.  For many of my clients, getting paid is just as important as finding new clients. Some of them don’t have the time or the resources to find new clients because they spend so much energy chasing after the money they are already owed.

This isn’t an issue unique to my client base. There are many articles revolving around the freelance payment problem (See She Waited 120 Days to be Paid and Would You Settle for Half of What You’re Owed?) I’d like to offer three techniques to navigate around the payment problem, including the method that I use with my own clients.

Three Paths Around the Payment Problem

1)    Set out clear payment terms in writing before you start a job: A small business owner has to wear many hats. At times, administrative tasks are done in a stripped down fashion or ignored altogether to maximize time and resources. Formal and comprehensive contracts often become a casualty of this process, because negotiating a deal can be confusing, stressful, time consuming and might result in lost business (See You Signed the Contract, but Do You Know What it Says?). But not having a contract can be more detrimental in the long term. Without a written agreement, the terms of your engagement are based on vague and biased recollection. Without clear payment terms, you could be at the mercy and cash flow of your clients. Without an actual contract, your legal remedies could be limited.

2)    Take advantage of human motivation when defining your payment terms: I have observed a specific aspect of human nature in my practice. When a client wants something, he has more incentive to pay. After the client gets what he wants, he has less incentive to pay. If you structure your payment terms to receive payment weeks or months after you deliver your goods or services, you are working at a disadvantage. I will explain my method of adapting to human motivation below, although I realize not everyone is in a position to be paid before the work gets done.

3)    Know which jobs to walk away from: Instinct and experience can warn you when a potential client might pose a payment problem. If your background and reference check of your clients reveal red flags, or if you get the sense in your initial discussions with your new client that cash flow might be an issue. It might make sense to pass on the job and focus your attention on the paying clients. (See Twelve Tips for Contract Negotiation) When you do work for someone who isn’t paying, you not only lose time chasing them down for money, you lose time finding and servicing those clients who are actually growing your business.

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The Tennis Method for Payment Terms

            As a lawyer, people expect a certain amount of cold blooded professionalism from me. In almost ten years of independent practice, no client has questioned my payment terms or been late in paying me. I think the method I use is applicable to other types of small business, so I’ll share it with you. Please feel free to modify it for your needs.

            The tennis method gets its name from the back and forth dynamic of my business process. A typical engagement has six parts.

1)    First contact: A client finds me through a referral or an online post and requests a free consultation online or over the phone.

2)    Engagement letter: Once I understand what the client needs and I determine I can do the job, I send the potential client an engagement letter laying out the service I am willing to provide and the payment I require for that service.

3)    First payment: The client expresses their agreement to the engagement letter by paying ½ of my fee upfront.

4)    Work: I perform all the tasks detailed in the engagement letter (See C3 Services)

5)    Second payment: When the work is done, I notify the client and the client delivers the second portion of the fee.

6)    Delivery: Once final payment is received, all the deliverables are sent to the client.

            Notice how the dynamic plays into human motivation on both sides. Once the client pays, I have the incentive to start working because she gave me money and because I know I won’t get the rest of it until I do the work. The client pays because they know nothing will happen until they pay and after they’ve made the first payment, they don’t want to throw their initial money away by not getting the work. Everyone stays honest and everyone gets what they want.

Fit to Taste

            Every small business may not be able to utilize the tennis method. The goods or services you have might not lend themselves to this process. You might not be in a position to dictate payment terms (See David and Goliath in Contract Negotiation). But in extreme cases, it might be better to walk away from a deal you won’t get paid for than to stick it out, hope for the best and not get paid (See How to Reject a Bad Contract). Getting paid is an important aspect of small business and you can only work so many hours in a day. Get a deal in writing that protects your business and let someone else deal with the problem clients.

Have fun.


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