A Freelancer’s Guide: How to Set Payment Terms
You’re a freelancer with valuable skills. On top of doing your job well, you’re prompt, professional, and courteous. Now you need to look at payment terms for freelancers.
You also have clients who want to negotiate your terms or take their time paying.
So what you need are more concrete payment terms.
If your current payment terms aren’t working (or you don’t have any at all), read this guide to learn how to define your payment expectations and present them to clients.
Why Payment Terms Are Vital to Your Business’s Health
One of the downsides of freelancing is that income is unpredictable. When you don’t know for sure when your next gig will come down the pipeline, budgeting is a difficult task.
Payment terms for freelancers will ensure that when you do work for a client, money will be in your account by the due date. Then, your short-term cash flow is predictable, and you can pay your bills.
But like a backlogged freelance job, there’s a domino effect that happens when one cog in the system is delayed.
If your client doesn’t pay when they should have, you won’t be able to pay the bills you planned to cover in the expected timeframe.
Aside from requesting payment upfront, there is no guaranteed way to force customers to pay timely. Clear and concise payment terms improve the chances of getting paid on time and in full.
Designing Your Contract
Imagine you were shopping at a grocery store. You know what you need, and you have an idea of how much you want to spend.
Now imagine that each item has an approximate cost, and until you go to check out, you don’t know what the total will be.
That wouldn’t be a fun way to shop, and most of us would never go to a store like that.
Yet it’s how a lot of freelancers run their businesses: they give clients an estimated cost, then adjust it as they go without discussing any of the changes with the person who is going to pay the bill.
How to Deal With Changing Costs and Payment Terms
The problem isn’t the fact that your job costs can fluctuate. That’s normal in many industries.
If you didn’t give your client a heads-up about the possibility, or you don’t have documentation that a price change could happen, they aren’t going to be happy when they go to “check out.”
Make Sure You’re Both on the Same Page
The same idea applies to things like payment options/methods, due dates, and late payment penalties.
You may assume they know to pay you promptly, but many clients are used to being invoiced and having 30 or 60 days to remit payment.
The first time a client sees your payment terms should be before you ever lift a finger to do their job. It makes it easier on everyone when the expectations and prices are given ahead of time.
Include a Payment Terms Clause in Your Contract
Unless you’re hired through a service like Upwork that does the contracting terms for you, you should have a contract template.
A contract template includes the job description, deadlines, and payment expectations. It’s signed by the client when you both agree on the terms.
Here’s an example of a basic payment terms clause:
Whatever your contract and payment terms look like, make sure they’re legally binding. Before you finalize your document and start using it, head over to Selfgood for discounted expert legal advice.
Determining Pricing
When you price your services, make sure that your pricing covers your costs and yields a profit.
There’s a lot of math involved here. You could just grab a random number and go with it, but that’s not going to get you to your goals in a strategic way.
How to Price Your Products
Here’s a simplified breakdown of how to price a product:
- Add the cost of the materials and labor it takes to produce one product.
- Decide how much of a profit you want to make on each item and add that to the total you charge your customers.
(Obviously, this is a very simplified tutorial. There’s a more in-depth guide over at the Shopify site.)
You can use these amounts to set your target goals for each item. For instance, if you want to gross $2,000 per week, figure out how many of Item A and Item B you have to sell to make that happen.
How to Price Your Services
Pricing can get complicated when you sell services instead of products. How do you determine what your time is worth as a freelance writer, for example?
Well, you work backward.
Decide how much you want to make annually by checking out other freelancers in the industry and analyzing your own lifestyle goals.
Then, divide that number by 50 weeks (assuming you’ll take about two weeks for vacation), and that’s what you need to earn each week.
Break that down by how many hours you plan to work weekly, and you have an idea of what you should be charging per hour.
If that doesn’t seem reasonable, figure out what you need to do to make it happen.
For instance, if you want to earn $100,000 a year and work 50 weeks a year:
$100,000 per year divided by 50 weeks is $2,000 per week. But if you only plan to work 10 hours a week and charge $200 per hour, your clients might go elsewhere.
If you increase your working hours, you can decrease your rates and attract more clients.
Setting Your Terms
Every successful business has established payment terms in place.
For example, you wouldn’t head into a grocery store, load up your cart, and check out without a method of payment. You know the store will expect to finalize the transaction there — they’re not going to invoice you and wait for you to pay.
Does your client know that you expect payment when your work is completed? How can you make your terms as clear as the grocery store makes theirs?
What to Cover in Your Freelance Contract
We’ve already discussed including payment terms and rates, but there are a lot of other sections to cover. Deliverables, due dates, costs, and billing details are all included in this section.
Deliverables
The work the client thinks they’re hiring you to do and what you perceive the project to look like may not be the same.
In this part of the contract, clearly state what the final result will look like and the milestones or phases of the work that will get you there.
Deliverable Due Dates
Specify the exact due dates for each milestone, when you’ll follow up with the client, and when the final product is to be completed.
If it’s one project, this might be one specific date. Ongoing work might be 2-3 days after the task is assigned.
Cost of Work
How will you bill the client? Do you charge by the hour, milestone, project, or something else?
Are there materials and other expenses that the client will be responsible for paying?
Billing Frequency
Let clients know when you send invoices.
Do you include one with the final work and payment is due upon receipt, or do you use invoicing software that automates monthly or biweekly bill payments?
Payment Methods You Take
Everyone has their preferred way to pay their bills. Clearly stating your accepted methods of payments can eliminate hassle when it’s time to collect your money.
A prospective client could be expecting to pay you via credit card because they get reimbursed or accrue points. If you don’t take cards, they’ll either have to find another way to pay or hire a different freelancer. At least you both know the problem ahead of time.
As a small business owner, you should at minimum have a bank account set up to accept online payments and direct deposits. Unless you do a lot of overseas work, it’s better to avoid the fees that come with wire transfers and cryptocurrency apps.
Payment Due Dates
Include payment due dates the same way you spell out deliverable due dates.
Is there an upfront deposit due before you start working? What are your late payment terms? Do you charge fees and send clients to other agencies for nonpayment?
Whatever your policies are, make them known. It doesn’t hurt to add a little blurb on your freelancer invoice that says something like “Prompt payment appreciated” either.
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Other Factors to Consider When Setting Your Payment Terms
Adding an extra fee for late payments is one thing, but what about a positive reward for on-time or early payment?
Everyone loves free stuff, so why not use positive reinforcement to get them to do what you want?
Discounts for Clients
Discounts can get your clients to pay on time or with a specific method.
Here are a few simple suggestions:
- Offer 5% off the next service if they pay within ten days of the invoice date
- Give a slight discount to clients who pay through your preferred method (we see this all over the country as retailers try to get people to pay with cash instead of making credit card payments)
- Provide discounts to regular clients if they set up recurring payments
These carrots might hit you in the wallet a few dollars, but the benefits of faster payment and improved client relationships balance it out.
Don’t Forget to Factor in Currency Rates
Do you deal with any international clients? If so, the differences in the currency could become a big deal later.
Self-employed businesses that work with international clients need to factor in the exchange rate and clarify which currency the invoiced amount is in.
Down Payment Finesse
Down payments, also called deposits, are a sensitive subject for some clients.
With certain freelance work, deposits come with the territory. In other jobs, asking for a deposit can scare a client away.
Consider making a deposit part of your normal procedure, even if it’s a small hold. The potential clients who get offended or refuse to pay probably would have been difficult to deal with, anyway.
Since those who stick around have already paid you for part of the job, they’re invested in working with you.
However, this can be a faux pas if you ask for deposits from long-term clients or major companies. Make it a policy to skip the down payments in these situations.
Choosing Resources That Will Help You Get Paid
Let’s be real:
Handwriting invoices and mailing them yourself is expensive and can cost you a lot if you misplace a client’s bill.
If you want to get paid with 21st-century terms and methods, use up-to-date tools:
Freelancer Benefits
To start, sign up for a membership at Selfgood. Selfgood is a platform designed to give freelancers all the resources they need to succeed.
As a member, you can access discounted legal and tax advice to guide you as you set up contracts and learn your rights. You’ll also get access to supplemental health insurance that fills in the gaps of your existing insurance.
CRM Software
Next, invest in a customer relationship management (CRM) platform to streamline your bill process.
The right CRM makes designing your invoice template and interacting with clients seamless and simple.
Accounting Software
Finally, use accounting systems that integrate software, like TurboTax and QuickBooks.
Organizing your invoices, receipts, and expenses is simplified when your taxes and bank accounts are in sync.
Conclusion
How much time are you wasting trying to track down invoice payments for work you’ve already done? Your skills are valuable, and every minute counts.
Quit the cycle of chasing after your clients and use these tips to set your payment terms. With the right format and help from resources like Selfgood, you can put your focus on your freelance business where it belongs!
