A guide to using upfront payments and deposits

If you’re a skilled worker running your own service business, chances are you’ve had the odd bad experience with a customer. Maybe they didn’t pay on time or even didn’t pay at all.

These kinds of experiences can be very damaging to your business so it’s important to take steps to protect yourself and your business.

One of the best ways to do this is to take an upfront payment or deposit before undertaking any work.

But when is it appropriate to ask for these payments and how should you go about making these requests to the customer?

Let's find out

Upfront payments vs deposits

Deposits and upfront payments achieve a similar result - they provide your business with an initial payment before you start the project.

Although, technically, a deposit is a form of upfront payment there is a difference.

With a deposit, money is taken as a guarantee before the work is begun and is usually taken as a percentage of the whole project. This can be useful to help finance the work being undertaken.

Other forms of upfront payment, on the other hand, usually refer to initial fees that are charged for a survey, quote or other assessment, done before the main work is started.

This expense may simply be presented as a call-out fee for reviewing the job but it could also be for anything that requires an initial upfront investment of time and expertise.

An upfront payment is charged separately from the cost of the work being asked for.

It is possible to charge an initial upfront payment and follow up with a deposit, depending on how you want to structure your prices.

For more information on deciding your prices check out our article on how to price a job.

When to charge a deposit

Deposits are usually used when working on expensive projects that involve a high upfront cost. The deposit works as an initial fund for you to begin the work and a guarantee from the customer that they are fully invested in the project and that they will pay.

By taking a deposit you can weed out those who might be trying to leave you short-changed. By committing to an upfront payment it helps to prove a customer has the funds and is a reliable payer.

Deposits can be used on any type of work but usually, they’d be used for any work that takes over 24 hours or cost more than 1k. For short, inexpensive projects, you may not feel the need to use a deposit, especially if it’s a repeat customer you know and trust.

Here’s a quick checklist to go through when deciding to take a deposit:

• Is the work worth over 1k
• Will the project take over 24 hours
• Have you worked with the customer before
• Do you hold something valuable to the customer you can use as a payment guarantee
• Do you have another method to ensure payment

If the answer is yes for either of the first three questions and no for either of the second, you need a deposit.

Benefits of using deposits

Using a deposit has a number of benefits, as touched on above. These include the following:

• Upfront capital - You have the initial funds to cover your expenses
• Reduce no-payments - A deposit proves a customer is willing to pay and allows you to check they are punctual and reliable
• Funds for supplies - Supplies and materials are expensive, the deposit allows you to pay for these without damaging your balance sheets
• Avoid bad clients - If a potential customer takes issue with a deposit you have an early filter that lets you avoid payment issues down the line.

Why you should use upfront payments

Upfront payments are a great way of protecting your time and ensuring commitment from customers.

Taking an upfront payment has not always been the standard within the skilled trades industry however it is increasingly being used by many different tradies.

The practice of charging for a quote or assessment is standard amongst many other industries, for example, architects will charge a customer for their plans and drawings.

By using an initial payment you ensure you are paid for the upfront work you have to put in before starting the main project. Performing an assessment and designing a quote takes time and costs you money, charging for this is a good idea.

Types of upfront payments

There are many different types of upfront payments. Not all will be relevant to you, but it’s useful to understand the options available:

• Deposits
• Full payments
• Assessment/quote fees
• Call out fees

Should you charge a call-out fee?

Whether you charge a call-out fee depends on how you want to operate your business. If you can afford to travel to a customer, potentially missing other work opportunities while doing so, then perhaps you don’t need a call-out fee.

However in most cases using a call-out fee is a good idea, particularly if the customer isn’t nearby. This means visiting a customer doesn’t cost you money or at least reduces the expense.

If you are losing out on work or wasting time with call-outs that don’t manifest into work, then you are the one out of pocket.

Call-out fees protect your prophets and also help to set customer expectations. A customer that pays a call-out fee is likely to appreciate and value your time.

What’s more these initial charges can make it more likely that a customer will give you the job. This works by using the sunk-cost fallacy. As the customer has already committed financially to your business they feel more inclined to follow up on this initial expense, paying for the full job, to get the full value out of it.

Understandably if you’re struggling for work within a competitive market, it may not always be easy to add these charges, however even a small fee is a good idea.

You will likely find even if you lose some customers you will more than make up for it by recuperating costs through the fee and by gaining better customers.

You could even consider putting up your prices. Read our article covering top tips on how to increase your prices, for help with this.

How to ask for deposits and upfront payments

When asking for a deposit or other upfront payment there are some best practices you should follow:

Prove your credibility

Before you even mention payment of any kind it’s important to prove yourself and establish trust with the customer.

This can be achieved in a number of ways. Predominantly it’s about appearance and communication. You need to present yourself as trustworthy and reliable.

An easy way to do this is simply through recommendations, if you come recommended this already puts you on the front foot.

However not all customers will come via recommendation, this is why it’s important to have a good website and plenty of positive reviews to build trust.

A positive review acts like a mini recommendation, in fact, 49% of consumers trust online reviews as much as personal recommendations.

If you want help increasing your reviews, Payaca can help you with that, check out our article on how to skyrocket your 5 star reviews for more information.

Incentivise

Adding a discount or an extra add-on can help sweeten the deal, leaving the customer feeling valued and less surprised by an extra charge.

A recommended approach used in many different industries is price anchoring.

This is a psychological technique that leverages the human tendency to heavily lean on an initial piece of information when decision-making.

By starting your prices at a higher figure and then bringing the cost down with a discount, the customer is more likely to perceive the second figure as good value.

Make it easy

If you want a customer to make an initial payment you need to make it as easy for them as possible. This means having the ability to take the payment there and then as you complete the initial assessment.

Being able to take card payments on-site is very important for this. The good news is you can do this very easily by using software like Payaca, which allows you to take payments and process them wherever you are.

Be upfront from the start

Be clear with your customer, if they’re going to need to pay you upfront, the sooner they know about it the better. Don’t try hiding this information or slipping it in as an afterthought.

Make sure your policy on payments is clearly displayed on your website and follow this up with the customer in your initial conversations.

Customers are far more likely to receive your expectations positively if you’re transparent from the start.

Speak to the customer

Following on from the point above, speaking to your customer is important. A lot can be missed if communication is only done in writing.

Chatting to the customer over the phone or in person makes it easier to build rapport and allows the customer to voice any concerns from the start.

Show the value

If you want a customer to pay for something you need them to understand what they’re paying for, this applies to providing a quote through to the cost of an in-person visit.

Let the customer know why you’re charging this price and the costs for you, while also translating the value to them.

For example, an in-person visit allows you to provide a better assessment and price more effectively while a deposit means you can purchase and provide the customer with higher-quality materials.

Follow local laws

Check your local laws, for example in the US there are specific state requirements relating to deposits which set a maximum threshold a business or individual can ask for.

Although the law in the UK is less defined British service workers should be aware that there are laws such as the Consumer Rights Act 2015, which protect customers from poor quality service or unreasonable price demands.

In Australia and New Zealand, they also have similar laws such as the Competition and Consumer Act 2010 and the Fair Trading Act 1986.

Always ensure you use clear terms and conditions that are agreed by the customer and that you operate to the expected standards of quality.

Managing customers

If we were to pare back what is required when taking deposits and upfront payments, then it can essentially be boiled down to one key concept, customer management.

Getting your customers to pay is all about establishing positive relationships and handling your customers with care and respect.

Following the advice in this blog will allow you to take deposits and payments far more easily, but for a more comprehensive guide to managing customers then check out our article on customer communication.

‍