Before you make too much headway with your service business, think about how you will charge your clients and when. In many cases, cash flow strategies like deposits can increase profitability and enable you to meet your customers’ needs.

What Is a Deposit and Why Should You Ask for One?

A deposit is a percentage of the total amount a customer is charged. The customer will pay that percentage up-front before a job or service is completed. This provides benefits for both the client and the business.

Benefits of Collecting Payment Upfront

Customers are generally happy to pay a deposit. A deposit allows the business the security to take the customer’s interest seriously and provide them with the service promptly. Here are some advantages for businesses that ask for a deposit up-front:

• Increased Working Capital: Asking for money from the beginning allows for more money to help you meet your current obligations, including the project the current client is paying you for.
  
  

• Fewer Bad Clients: If a client refuses or forgets to pay a deposit, then you know you shouldn’t waste your time trying to convince them to hire you. Deposits weed out the clients that aren’t willing to pay, so you can focus on those that really want your service.
  
  

• More Invested Clients: When a client pays the deposit, you know they likely won’t back out of the agreement. You can finish the job with confidence that you will get paid the rest of the agreed amount.
  
  

• Funds to Cover Expenses: A deposit could allow the job to fund itself. Instead of taking money out of another budget category, use the deposit to buy materials for the same job. That way, you won’t run out of money in the middle of any job.
  
  

• Improved Cash Flow: Asking for deposits is a smart cash flow strategy. High cash flow, “enables [a business] to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.”
  
  

• Fewer Unpaid Invoices: In any service business, getting customers to pay for services can be a challenge. Asking for a deposit up-front means that you get paid at least in part for the services you provide.
  
  

• Less Frequent Late Fees: One strategy to get reluctant clients to pay after a job is completed is to impose a late fee. Doing so isn’t fun for the business, and it’s certainly not fun for the customer. Instead, ask for a deposit and avoid charging late fees.

When To Ask for a Deposit

Deposits should be requested at the beginning of each project before you even purchase supplies. The customer should agree to pay a deposit before any timeline arrangements are finalized.

That said, not every situation warrants a deposit from your customer. Many businesses do just fine asking for payment after the job is done. The following situations are examples of when to ask for a deposit:

Costly Projects

This type of service usually applies to contractors: plumbers, electricians, roofers, carpenters, etc. Whenever you have a job that requires you to buy parts or supplies, you should ask for a deposit. That way, you ensure you minimize risk and avoid buying supplies you don’t end up using.

Long Projects

If you take on a project that will take you several days to complete, collect payment up-front. That way you’re spending your time working for a paying client and not wondering if you could be using your time better working for someone else.

Specialized Projects

Projects that require a lot of training or skill deserve a deposit. Your client will expect it for specialized tasks. In a client’s mind, a deposit equals quality. If they have to pay up-front for something, it’s the contractor’s job to make the results worth the deposit.

Frequently Asked Questions About Deposits

How Do You Politely Ask for a Deposit?

Most good customers will probably be expecting to pay a deposit for contracting work. A deposit helps them feel secure because they know their project is on your task list. Don’t be scared to collect payment in the early stages of discussion with a new client. Help them see how paying a deposit can benefit them.

How Much Do You Ask for a Deposit?

Individual states regulate the amount you can charge for a deposit, so be sure to check with your state for contract laws. Otherwise, you have many options for how to split up charges. Somewhere in the realm of 10% – 25% is usually safe. Check out this blog for a great idea of how to split up charges.

What Do I Do If a Client Won’t Pay Me?

Unfortunately, sometimes a client refuses to pay after a job is complete. If possible, you might want to refuse to give them the services they requested, but that isn’t a perfect solution. You still lost all that time! Instead of worrying about unpaid invoices, start taking deposits before jobs to ensure you’ll get paid for your work.

Do Deposits Go Toward Service?

Deposits work best in the service industry. You can choose what your deposits cover in your own business, whether that be supplies, paychecks, or advertising.

Use Allset To Send Deposit Invoices

Allset Pay by Text is a quick and easy way to send your clients an invoice before you start work for them. All they have to do is click the link and funds will be transferred to your account. Then you can get to work. Try Allset today!