If you’re a tradie, you are likely one of thousands of similar small companies struggling to get your clients to pay you on time. Like those other businesses, you probably don’t have a clear idea on what to do about it, either.
In 2019, Stats NZ reported that 7242 construction companies closed down. The main reason? They were experiencing a cash flow crisis. Not having enough cash in the bank to pay wages, GST bills or to buy materials will make it impossible to continue to run a profitable business.
How to avoid going under
If you ask all your clients for a deposit before commencing work, you not only get cash to cover your materials upfront, but you are actually pre-qualifying your clients as good payers – before you’re out of pocket.
By taking a deposit, you are making a statement. You are telling clients that you both deserve and expect payment. You are laying the foundations for a solid business deal, because you are, after all, running a business. To survive and not become just another statistic, you need to get paid faster.
What happens if you don't use payment terms?
If you operate like a lot of tradies, you might confirm a job by calling the client. There might not be much (if any) chat about the charge-up rate, or how (and when!) you expect your client to pay you.
This lack of process and unclear payment terms tells your client a story – and that story is that you are lax about needing payment. By not telling them your terms, you give clients the message that money isn’t important to you. A weird thing happens when you don’t take charge and communicate how you expect to be paid: your clients will assume that you’re not too worried about getting paid, and that you’ll probably also be slack in following up.
So what happens? Your clients adopt the same casual attitude, and are slack with paying you when you do end up sending them your invoice.
Taking control nice and early by asking for a decent deposit sends the RIGHT signal. That signal tells your clients that you expect payment so you can order materials or book in the job. It also tells them when they can expect to be invoiced, so they can prepare to have the money on hand to pay what they owe you. It’s good for you AND it’s good for them, too.
Not only an essential tool for cashflow reasons, deposits screen potential clients. Taking a deposit ensures that the only people you’re working for are those who are willing to pay for your time right from the start.
How to work out if you should you ask for a deposit?
If you respond ‘yes’ to any of the questions below, you should be asking for a deposit:
A deposit helps with cashflow as soon as you collect it AND it helps to protect that cashflow, so you can be more certain that the balance will also get paid on time. This is because asking for payment at the beginning of your client relationship makes asking for the balance part way through or at the end of the job a LOT easier – and it won’t take your client by surprise as they’ll be expecting your invoice.
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How much should you take as a deposit?
If you’re not sure about how much of a deposit you should ask for, a good starting point is to think about these five points:
This could end up as a sum like 25%, or if your fixed sum includes a big materials cost, it could be as much as 50% to cover that cost plus your admin time to sort and plan everything out.
Remember that you don’t need to have started the job to request payment.
Taking control of your payment process
The goal is to take control of your:
With a deposit to cover expenses before the job begins
To show the client you’re serious about booking jobs with quality clients
By using your deposits to check you have a client who is willing to lock in – and pay for – your services
Remember that payment problems usually occur with customers who don’t understand the value of the work you do – or if they had expectations that were not met, because you didn’t communicate with them and give them the critical information they needed to understand the job at hand.
Take control of your contracting process and take a deposit for every job, every time.
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As a tradie, you want quality clients who you know will pay you on time. Pre-qualifying your clients means that you won’t be leaving it to chance. How? Take back control, by requiring a deposit for every job, every time.
It’s essential to identify the changes you need to make in your trade business to survive and thrive in any economy. The key is to focus on implementing and communicating your payment terms so clients know when to pay you and you can maximise your cash flow.
The most effective and scalable way to ensure you maximise your cash flow is to set professional, relevant terms of trade. Learn what a favourable terms of trade could do for your business.