So I’m in the freelancing and online business game for more than a decade. Same as everyone else, I started as a rookie, making the same rookie mistakes, which were then reflected in my monthly earnings (or absence of them). A typical mistake is starting the work without receiving payment from the client. I’ll show you how doing this will cost you thousands of dollars in the long run. And yes, I have the exact numbers.
Personally, for projects under $1,000, I require 100% of the payment upfront. For bigger projects, I define milestones with the client and the payments arrive in chunks, but are still paid in advance.
The value of future payments is always lower than if you get paid right now
The expected value of the payment is lower than in the original deal, so you are always ripping yourself off. Say we are talking about $1,000 for a smaller project, and your hourly rate is $100 for a productive hour of deep work. You did the work on the project and didn’t get paid yet, so let’s look at it from an economic POV by analyzing the costs and gains.
Cost: Time spent working on the task
You’ve already spent 10 hours of your productive time on this task. Time is a non-renewable resource and you should be very careful and wise with how you spend it. If I do not have client projects to work on, I have a lot of work-related things on my checklist. These things will move me closer to my targets. So rather than participating in a project, where I’m not a good fit, I spend my time on one of these things below:
- Business administration I need to do
- Books I would like to read
- Podcasts I would like to hear
So incorporate this as a $1,000 cost, which is 10 hours * $100 per hour.
Cost: Risk of you not getting paid
There is always a risk of you not getting the payment, period. It could be for multiple reasons:
- Your client is not getting paid by their own client
- Your client is not responsible with finances or well organized, so he does not have the money right now (based on my experience, this is the most frequent reason – your client wants to pay you, but he did not organize his job well and now he simply does not have the resources)
- Your client is getting sick, or dies – I do not want to sound morbid, but these things can happen as well (luckily never happened to me)
You can argue with me, that these things are really rare. But let’s look at this case through the lens of Expected Value.
Say, that one out of every hundred clients is simply not paying you because of one the reasons listed above. So the expected value of your earnings would be:
(99 clients * $1,000) / 100 clients = $99,000 / 100 clients = $990 per client.
We can say, that the $10 from $1,000, or 1% from the payment is simply representing the risk of you are not getting paid. One could argue, that 1% is not a big deal, but:
- You are losing your edge here. It’s a small edge. But successful entrepreneurship (thus freelancing too) is about being very thorough and picking up every small advantage you can.
- Obviously, this is just the monetary value. You’ll also be investing some time into trying to claim the payment and all the administration connected with it.
Cost: Tracking the payments
If you only work after receiving full payment up front, then this indirect cost of tracking and administration is absorbed by your client. They have some kind of problem and need you to create a solution. So once they are ready to move forward, they will simply pay you, send you an email and you can start working. Then, you only need to check whether the payment arrived once.
If you are doing it the other way around, then you need to set up some kind of tracking system, which is checking the payments on a regular basis and creating a report:
- Which tasks are paid
- Which tasks are not paid, but not due
- Which tasks are not paid and due
So, let’s say, that this report itself consumes half an hour per week. This is 2 hours per month. This is productive time, so you could’ve spent the time on your client projects and thus your opportunity costs are $100 * 2 = $200.
Based on my observations, I’m able to work like 90 productive hours per month. The 2 hours of administration can be seen as a fixed cost, lowering my available productive time from 90 hours to 88 hours, meaning that my productivity would be 97.7% instead of 100%. We can look at it in 2 ways:
- Yearly fixed costs of this administrative process are $200 * 12 months = $2,400. So you are basically throwing more than two thousand dollars out of the window. Even though you are earning pretty well, this is serious money!
- Variable costs per project – The drop in productivity is 2.3%, so from every $1,000 you earn, $23 is spent on administration and tracking of the payments.
Cost: Collecting the money
When is your client due to pay, then you have a big problem because you have already heavily invested in the project. And yes, I’m talking about the time you spent there.
The right business decision here, would be to make the best possible effort to ensure your client pays the invoice. Also, you can sometimes find yourself thinking that the client is “worth it”, or important for you. You will try to collect the debt in a subtle way, in order to keep the client sweet (although I would argue with this approach).
In my case, the following process evolved:
- Ask, if everything is ok with your project or if the client is struggling with something
- Send the client a gentle reminder
- Send the client a more straightforward reminder
- Talk to the client and try to find out, what problem is causing the delay with the payment. The client is often avoiding you, so this step involves trying different contact methods
- Escalate this to the court or use the law (I’ve never had to do this)
Remember, in the beginning, I’ve estimated, that 1 client per 100 won’t pay you at all. But there will be a few clients, who will not pay immediately, but will do so after the escalation. This all depends on the quality of your leads and client pool, but let’s say, that 5 clients per 100 would need some kind of reminder and you’ll spend on average 2 productive hours on chasing their debt.
The math behind it:
100 clients at $1,000 = $100,000 of revenue
5 clients taking 2 hours at $100 per hour = 5*2*$100 = $1000
Monetary impact = $1,000 / $100,000 = 1%
On average, 1% of your earnings would be scraped down by collecting your money
Cost: Well Being
The situation itself produces uncertainty and it is stressful. If you do not have a strong mental game, then it will influence you outside of your work time and lower your overall well being and enjoyment of life.
Calculating this would be a kind of a bro-science, but just for an example:
- 2 stressful clients per year
- Each one owes you an amount of money – losing which, will have a demonstrable influence on your life
- The uncertainty lasts 3 weeks per client
This would leave us with 6 weeks of worrying. Since you are not a machine, these 6 weeks will also translate into you being less happy, less productive, more aggressive and annoying. I don’t know, how you value peace of mind, but I would say, it is at least $200 per week, leaving me with $200 * 6 = $1200 costs.
The same percentage as above, $1,200 from $100,000 is actually 1.2% accountable for the loss of well being
Cost: Potential business damage
When the client owes you money, you might be tempted to do some kind of shady move, like damaging their reputation. I’m playing fair and value my moral integrity, so I strongly do not recommend taking action like this. Even if you are not doing it and only escalate the payment collection slowly and carefully, the client might choose a strategy of media blackmailing / warfare.
This type of client will throw dirt at you and, even though you are innocent, something will always stick. Another bro-math:
- 10 bad clients in 5 years
- 1 of them will undertake maximum effort to destroy you
- It takes you 3 hours, to negotiate a $1000 deal
- This bad reputation will kill you 2 deals from 100, meaning you’ve spent 6 hours for nothing
- 6 hours * $100 = $600
Means 0.6% from $100,000 of projected turnover.
Cost: Other hidden costs
There are a few possibilities for how the payment could increase:
- The client will voluntarily pay you more as a gesture for being late
- The client will involuntarily pay you more because you have some kind of fee in your agreement
To be honest, these things happen so rarely, I’ve never heard about them.
On the other hand, there are plenty of other things lowering the expected value of your future payment and we did not account for them. For example, you really need the money and you have to borrow for 10% interest rate per annum. Or you have the opportunity to make a good purchase, but you are not able to close the deal, because, surprisingly, you don’t have the money. And next time, when you can actually purchase the thing, it is more expensive.
Let’s be really optimistic and account this as 1.4% from the expected value.
Total costs of the delayed payment:
- Risk of not getting paid: 1%
- Tracking down the payments: 2.3%
- Collecting the payments: 1%
- Well being: 1.2%
- Potential business damages: 0.6%
- Other hidden costs: 1.4%
If we add up all these costs, if you work without being paid upfront, then it costs you at least 7.5% of your earnings. And this is just the best possible scenario (for example, we forgot to calculate with inflation and opportunity costs of interest rates).
Forecast of loss in time
|AVG. Monthly earnings||1 year loss||5 years loss||10 years loss|
Just to create some context here, you can see, that if you would be able to make $5k per month as a freelancer for 10 years straight and bill your clients only after finishing the project, then you will lose $45,000. But this is an extreme example. I would say, that if you make more than $3k per month, then you are overall a good performer and you are already billing upfront. So the worst case scenarios, which are still happening would be:
- A freelancer is 5 years in the game
- He is mainly focused on his work and not on his business
- He is getting paid for most of his work after he finishes it
- He is able to make $3,000 per month, consistently
So a guy like this is losing $2,700 per year, resulting in a $13,500 loss in his freelance career. And this is real money, which can be earned simply by letting the client pay upfront!
How to prevent these losses and enhance your position as a freelancer
The most common answer I get is: “wait a moment, but my clients will not want to pay me upfront!” Yes, you are right, the transition from “getting paid after finishing the project” to “getting paid in advance” is not a revolutionary change. Look at it the same way as losing weight – you won’t wake up tomorrow 10 pounds lighter. It is an evolutionary process, where you make the transition in small steps.
Look at paying upfront through the eyes of your client
If you are paying for a service upfront, then you are giving up important leverage and you are significantly worsening your negotiation position. So it is a change from “if something goes terribly wrong, then I won’t pay for the project” to “If something goes terribly wrong, then I’ll have to invest extra energy to get my money back, and I do not know if I will get it back at all”
To pay upfront for a service, you have to be certain that the person you are hiring is a professional, who is able to finish your job according to your ideas. You’ll also need to know that the output won’t be terrible and if it is somehow terrible, then you will get your money back.
You are seeking these qualities:
- Knowledge – you want the person to know their field and be an expert in it
- Empathy and the ability to clearly communicate – if you are not on the same page and you are not getting meaningful responses, then it costs you more time and time is money
- Reliability, credibility, and trustfulness – you need to be sure that the person will deliver you a 5-star project and not run away with your money
For some inspiration see codeable.io (which I’m proudly a part of). They have a few hundred hand-picked developers, who are carefully vetted. This way, it is ensured that the developers will possess all the qualities to deliver you a 5-star project and you will be more likely to pay for your whole project upfront.
What you can do to get paid upfront as a freelancer
You need to demonstrate all the qualities listed above, simple as that. Here are the things I would do as a fresh WordPress freelance developer:
- Take only projects I’m certain I can finish – there is nothing worse than figuring out in the middle of the project, that you can’t solve it and now the panic begins. I’ve been in the field for more than 10 years, so there are no projects I can’t solve, there are just projects which will take longer than I anticipated and I’ll have to absorb the costs. Sometimes this happens and I’ve learned to accept it.
- Build a personal brand – if you do not let the world know what you did well, no-one else will. You’ll also create some kind of awareness about your person. You’ll demonstrate stability. Clients will come to you.
- Start with your current clients – do not worry. Clients come and go. Even relationships which have lasted for years will end eventually. Tell your current clients, that as with all your new clients, you are moving to a new process where you get paid in full upfront. Start with just telling them, test the waters and eventually ask them about doing the same. The ones who really value you, will not have any problem with it.
- Get paid upfront by new clients – it is always easier to start something off on the right foot, rather than alter an existing relationship. So tell all your clients, that you get paid upfront by standard. If they insist on paying after the job is delivered, then you have the freedom to choose whether to continue working with them.
- Create packages of hours – for example, I offer blocks of deep work. All of them are fully paid upfront.
It is obvious, that if you just started with freelancing and you haven’t much experience in your field or much of a track record, then you most probably cannot demand your clients pay the bills upfront. This is a continuous process – deliver the greatest work possible, never give up on the client and keep improving yourself. This way, you will slowly transition into a position where more clients will be demanding your services than you can take on. Then you can pick the right clients and have the negotiating position to introduce upfront payments and make not just one, but both sides very happy with highly effective results.