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To survive as a freelancer, you must satisfy one basic requirement: secure compensation for your work. To most, it seems simple enough – you send an invoice, and the client pays it.
If only it were that easy…
Every seasoned freelancer has a handful of horror stories about the times that clients disputed charges, were late on a payment, or just outright refused to pay. In fact, 71% of freelancers have experienced difficulty getting paid at some point in their careers. While payment disputes might feel like a fact of life for freelancers, most occur because there is no framework to the client relationship, allowing assumptions and misunderstandings between the two parties to arise.
Fortunately, the majority of payment disputes can be easily avoided with a clear and thorough policy that stipulates the terms of the payment. But surprisingly, the average freelancer either doesn’t have a payment policy, or has one that lacks key clauses.
Don’t wait to run into your first “problem client” to draw up a formal payment policy. Before you begin that next job, take the time to ask yourself these four questions as you put together a payment policy that will help preserve your freelance career:
How should I charge clients?
One of the great debates in the freelance community is: Should you charge by the hour, per project, or in the case of freelance writers, per word?
It’s an unusually complicated question whose answer depends entirely upon your freelance situation. Let’s review the options:
Charging per word
Charging per word is the most common method of pricing for freelance writers because it works for any experience level. Per-word rates vary significantly depending on:
- the type of content that’s being developed
- the scope and subject-matter of the piece
- the level of expertise that’s required
New writers often start out at $0.03 to $0.06 per word, while more seasoned writers, or those with niche expertise, can earn $.30+ per word.
Charging by the hour
An hourly rate is most common amongst freelancers who have some experience under their belt and is usually best in situations where:
- the work is ongoing or long-term
- the client requires a lot of meetings or frequent communications that you need to be compensated for
- the scope or nature of the work is expected to fluctuate
Charging per project
Charging per project is a popular choice for more experienced freelancers because this method:
- makes budgeting easier for you and your client
- maximizes your productivity
- lets you charge the same client different prices for different projects based on their value
Project-based pricing may also be easier for clients to understand. According to the Freelancers Union, “The client is more likely to accept your proposal of $200 for a project (that you know will take you 2 hours) than they would be to accept a proposal for $100/hour.”
After outlining the options above, it’s easy to see why deciding how to charge clients is such a hotly debated topic. There is no clear winner–the ideal rate ultimately depends on your specific situation.
With that said, we tend to find that your best bet is normally a hybrid approach: Establish the project with a set price, but include an hourly rate in your contract to account for any work completed above and beyond the original project scope.
How long should the payment term be?
Outlining an invoice due date may seem like a minor detail, but 29% of invoices are not paid on time. While a due date may not guarantee that a client doesn’t miss a payment, it can ensure you get paid faster.
In a study conducted by Xero, they found that payment terms are getting shorter, and that 75% of invoices have a due date that is two weeks or less from the date of invoice. Xero also dug into the invoices sent across their platform and discovered that late payments were made much earlier on invoices with only a one week due date. For example, late payments on invoices with a two week due date took an average of 5 days longer.
Unless there are special circumstances that require a client to extend a due date, I suggest that you don’t allow more than a week due date on your invoices. For some added assistance in this arena, most invoicing software and apps send automatic reminders to the client when an invoice is about to become past due. This can make all the difference between an invoice paid on time and one that misses the due date.
How should I accept payments?
This question is vital, as it will set the boundaries on how you receive your payments. There are two features you must consider: the methods of payments you accept, and the structure in which payments are to be made.
Before starting a relationship with any client, agreeing on a method of payment helps to avoid complications when it comes time to send the invoice. The last thing you want to hear from a client when they receive your invoice is that the client doesn’t support your preferred payment method.
Although we all have an ideal payment method that we’d like all of our clients to use, your payment policy should accept at least two different means of payment. The more forms of payment you accept, the easier it will be to maximize your client base.
Here’s a quick overview of the available options for freelancers:
- online debit or credit payments
- direct wire transfers
- ACH payments
- cash & checks
Before choosing the best forms of payment for you, it’s prudent to carefully weigh the advantages and disadvantages of each. There are multiple factors that could influence how you operate your business, including:
- processing fees
- time it takes to receive payment
- ease of setup
- support for international payments
- security of payment
The majority of freelancers stick with the traditional payment structure–they finish the project, send an invoice, and wait to get paid. There’s nothing inherently wrong with this structure, but as we know, it doesn’t provide you with much security in the event you get caught up with a “problem client”.
That’s why upfront or installment payments are the most ideal for freelancers as they guarantee, at the very least, a portion of the project fee. Consider one of the following upfront payment structures:
- 100% Upfront: The security and relief that come with receiving the full payment of a project before it has even started are desired by every freelancer. However, upfront payments are not easily obtained. Most clients feel it’s too risky for them, and usually only agree to them with freelancers they trust. This structure is also not very flexible if the scope of the project needs to be changed after it’s already been started–which as we know happens frequently.
- Percentage deposit: Requesting a percentage of the payment before beginning a project is much more palatable to clients than requiring 100% upfront. It’s common to ask for anywhere between 20%-50% of the project balance.
- Milestone payments: Milestone payments allows you to break a project up into smaller goals. As each goal is completed, the client pays a portion of the total balance until all goals are completed, and the project is paid in full. Of the three options, this installment structure is often the most preferred among clients because they don’t have to pay for work that has not yet been completed.
When requiring upfront or installment payments, remember that it’s best to send your client an estimate first so they can review and approve the cost breakdown of each item of the project.
What are the consequences of missing a due date?
With late payments being an all-too-common reality for freelancers, your payment policy needs to include clauses that demonstrate just how seriously you take getting paid. The last major consideration for your payment policy should be the extent of the penalty you’ll levy on clients who miss a due date, and the mechanisms that will be used to enforce the penalty.
Content Lead at Shopify, Anastasia Philopoulos, suggests that an accrued penalty fee works well as a strong disincentive to missing a due date. Each week that goes past your due date means another penalty–say $25–is added to the balance of the invoice. As the late fees pile up, your client will become extremely motivated to settle their debt.
Of course, accrued penalties only work if there is a way to legitimately enforce them. The easiest way for a freelancer to enforce their late fees and drastically increase the odds of getting paid is to not release the full extent of the work until a payment is made.
For a designer, this could mean only providing a screenshot of their creative work, or adding a watermark. For a web developer, they could keep the work on their own server. For a writer, they could send an excerpt of their work.
Finally, as an added measure of protection, you can add an ownership clause to your payment policy as well. This will help weaken the client’s legal claim to ownership over your work until he or she satisfies your invoice in full.
You may have not encountered a bad client yet, but it’s only a matter of time before the inevitable happens and you come across a problem client or experience a payment dispute. Don’t procrastinate–be proactive and follow the tips outlined above to develop an airtight payment policy that will save you headaches down the road!
Zachary Paruch is a project lead and small business expert at Invoice Genius, where he works daily with freelancers, contractors, and remote workers to streamline their businesses and help them get paid more quickly.