If you’re like many small business owners, chances are one of the biggest challenges in your business? Collecting payments from your clients or customers. Getting paid can be a hassle, but it impacts everything, from your cash flow to your ability to pay your expenses and payroll on time.
One way to ensure you have the cash you need to keep your business moving forward? Upfront payments.
Upfront payments put cash in your pocket immediately—before work even begins. But, depending on your business and clients, charging upfront may or may not be the right move.
Let’s look at everything you need to know about upfront payments: how they work, who they work for, and how to get your customers and clients to pay upfront.
What Are Upfront Payments—and When Do They Make Sense?
An upfront payment is a type of advance payment method where a customer or client pays you for work before it begins.
Upfront payments can be billed when you sign a contract, before you purchase equipment and tools necessary for starting and finishing a project, or at other points before the project’s completion (for example, installments at set milestones).
There are different ways to charge upfront. Sometimes, it means billing a customer in full—while in other cases, customers are billed a percentage or portion of the total payment upfront.
Requiring an advance payment could make sense in a variety of scenarios—for example, when you’re working with a potential client for the first time or when you’re starting on a long-term project.
It also makes sense to bill upfront if your business is going to incur expenses before you get started, like buying construction materials or hiring subcontractors before a home renovation.
The Pros and Cons of Upfront Payments
Depending on your business, your clients, and the kind of work you do, an upfront payment system (which includes both collecting partial or full payment upfront) may or may not make sense. This payment structure has both benefits and potential drawbacks—and it’s important to understand both so you can make the best decision for your business.
So what, exactly, are those benefits and drawbacks? Let’s take a look at the pros and cons of charging upfront.
So, what are some of the upsides of having clients pay from the get-go? Some of the benefits of upfront payments include:
- Reduces the risk of late payments and nonpayment: The unfortunate truth about running a business is that, sometimes, customers aren’t great at settling invoices. In fact, just about half of all business invoices in the U.S. end up being paid late. By charging clients upfront, you can eliminate the hassle of having to chase down late payments—or worse, clients not paying your invoice at all.
- Covers the cost of materials and supplies: Depending on the kind of work you do, you may need certain materials, supplies, and tools to start a project. But with requiring payment upfront, you don’t have to foot the bill yourself. Requesting money upfront—even if it’s just a partial payment that covers supply costs—can give you the working capital you need to cover your immediate expenses without having to dip into your business bank account.
- Saves time and money: Chasing after late payments and unpaid invoices takes time. Even if payment isn’t overdue, you still need to track open accounts receivable, follow up with payment reminders, and properly manage your liabilities. The kicker? This added work can increase labor costs, especially if you’re outsourcing your bookkeeping. Charging clients upfront eliminates all of that hassle—freeing up your time, energy, and resources.
- Improves cash flow: As a small business owner, consistent and predictable cash flow is a must. A client or customer who fails to pay you after you’ve completed a job can have a serious impact on your cash flow. Requiring an investment upfront, whether that’s a partial or full payment, can help ensure you have enough cash on hand to keep your business moving forward.
Charging upfront clearly has a lot of benefits—but it’s not without its drawbacks. Some potential cons of this payment method include:
- Creates a new obstacle to overcome: Negotiating work with a new customer is like walking a tightrope: failing to find the right balance can send you tumbling. If you don’t have an established rapport with a client or customer (and sometimes, even when you do), they might not be willing to consider paying upfront—which, unfortunately, can cause you to lose the business.
- Implies a lack of trust: Most clients and customers are trustworthy people that are unlikely to stiff you with an unpaid bill—and so, asking for money upfront might be perceived as a slight or an assumption that you don’t trust them to honor their obligation or contract. Not exactly ideal for building strong customer relationships.
- Can’t account for unexpected costs: What happens if you charge in full upfront, only to go significantly over budget? If your client thinks they’ve fully paid—but you have unexpected costs you need to cover as the project progresses—it puts you in a tough spot. You either need to ask them for more money, which could hurt your credibility—or you’ll need to eat the costs yourself, which will definitely hurt your budget.
How To Get Customers and Clients to Pay Upfront
We get it—money conversations are rarely easy or fun. And asking for payment upfront can be an even more difficult conversation to navigate.
But it doesn’t have to be! With the right approach, charging upfront can be a win for your business and your clients. So what, exactly, is the right approach?
Decide Who You Want to Have Pay Upfront
You don’t need to require advance payments from every client and customer. In some cases, it might make sense to charge new customers upfront and bill current clients after work is completed. In other cases, it might make sense not to require established or large businesses to pay in advance.
Before you start charging upfront, get a strategy in place of who and when you plan to collect payments before starting work—and, in those situations, how much (for example, a certain percentage) you’re going to collect. That strategy will help dictate if and when you need to have conversations around charging upfront.
Have the Conversation Early…
If you do want to charge upfront, you want to have that conversation as soon as possible. Discuss your payment terms and requirements during your first meeting or discovery call. This allows you to overcome any potential objections or hurdles that could complicate or end your working relationship from the get-go. It can also keep you from investing too much time and energy into a client that’s not going to agree to your payment structure.
…Then Establish and Build Trust
When a customer agrees to pay upfront, they’re taking on some risk that you might fail to deliver what you promised, leaving them high, dry, and with a lower bank account balance. As a business owner, you can alleviate these concerns by establishing your credibility and building trust with your new client—for example, through a visible online presence, active social media profiles, and glowing reviews and testimonials from past customers.
Clearly Outline Upfront Costs
Before you can tell a client how much you expect them to pay upfront, you need to know the worth and value of your products and services. This helps you frame an advance payment that’s accurately aligned with the total project cost of what you’re charging.
With the Hourly platform, you can see your labor costs in real-time, which will allow you to more accurately bill your clients—which is always important, but particularly important when charging upfront. (Hourly also uses time tracking and payroll data to calculate workers’ comp premiums with to-the-penny accuracy—which will help you avoid any unnecessary under or overpayments.)
Once you know how much the work will total, you can then decide if you want to charge in full or require a deposit before you start working. From there, you can walk your client through the costs and explain why you require full or partial payment before you get started.
Pro Tip: Offer an Incentive
One way to make upfront payments work for you? And your customers? Offer an incentive for paying in advance. This could be a discount on the total price, a free add-on or upgrade, or entry into a contest. By doing so, you create a win-win situation: your customers get a better deal, and you get the benefit of having the funds in hand sooner.
Add a Clause to Your Contract
After settling on the specifics, make sure to document the payment terms in your contract. The contract clause should include:
- When the payment is due
- The amount of money that is due (and if it’s a full or partial payment). For partial payments: when the remainder of the payment is due—and on what terms
- When and how the payment qualifies for a credit or refund
- How payment is accepted (direct deposit, check, credit card payment, online payment, etc.)
For example, a template of an upfront payment clause might read like the following:
Upfront Payment: Within five (5) days after the Effective Date, [Client Name] shall pay to [Business Name] a one-time, non-refundable and non-creditable upfront payment of [insert dollar amount].
Maintain Consistent Cash Flow and Avoid Late Invoices by Charging Upfront
Upfront payments are an effective payment method when working with new customers or hedging against the risk of overdue invoices—but they’re not ideal for every small business or situation.
Now that you understand the pros and cons of charging upfront (and how to determine whether it’s the right fit for your business and customers), you’re armed with the information you need to determine the best payment structure for you—and, if you do decide to charge upfront, to navigate the conversation in a way that works for you and your customers.
1. Introducing Yourself
Your introductory email needs to pack a lot of information into a small package. Try something like this:
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My name is John Doe and I work for ABC Agency, where we provide business insurance policies to many of Dallas' rockstar small businesses.
Congratulations on your new business, Jane's Bakery. Are you wondering if you have all the insurance you need? Or if your policies will really cover you in a pinch?
At ABC Agency, we pride ourselves on providing robust, comprehensive coverage options to companies like yours with flexible, pay-as-you-go plans.
Are you available this week to talk more about how we can help? I can help you find the most affordable rates and the best policies out there.
I look forward to speaking with you soon.
2. Presenting a Quote
Once you've met with your potential client, a quick reply with their quote will get the ball rolling.
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Thanks so much for meeting with me this morning. I loved touring Jane's Bakery–I can still smell those delicious chocolate chip cookies baking! You have a great location, and I'm sure you're going to do great on Front St.
After reviewing my notes, I've pulled together an insurance quote for you (attached). I recommend a business owner's policy. A BOP includes several insurance products in one: liability, property insurance, and business interruption insurance. It offers robust coverage at a competitive price.
I'll call you in a few days to see what you think about this insurance plan. In the meantime, if you have any questions, don't hesitate to email me or call me at [phone number].
Again, thank you for your time today. I look forward to working with you in the future.
3. Thanks for Purchasing a Policy
Gratitude is important! It's never a bad idea to thank your clients for their business.
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Thank you for choosing a business owner's policy with ABC Agency. We know it's so important to get the right coverage for your business, and we are honoured you've placed your trust in us.
We're excited to work closely with you, and our no. 1 goal is to make sure you're business is always protected.
Do you have any questions? We are here to help. Reach out whenever something comes to mind.
Thank you again for choosing ABC Agency to insure Jane's Bakery.
4. Welcome Email
A welcome email helps clients feel like you're there to help–and can softly pitch other insurance products you offer.
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Welcome to the ABC family! We are thrilled to have you as a new customer and can't wait to meet all of your insurance needs.
As an independent insurance agency, we work with multiple insurance providers to find the best coverage options for all our customers. If you need any other type of insurance–like [include additional offerings unique to your agency, like life insurance, health insurance, home insurance or anything else]–we can help you too.
Do you want to discuss any of these policies?
5. Introducing a New Product
A happy client may want to expand their business with you.
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I hope all is well with you and Jane's Bakery. I stopped in yesterday for a blueberry muffin and coffee, and they were delicious. I loved the hint of cinnamon in the muffin! Was that your idea?
I wanted you to be the first to know we are now offering commercial vehicle insurance to our policyholders. Auto insurance for your catering vans is super important since your personal car insurance won't cover them.
We're offering this insurance coverage solely to our current business clients at the moment and have some very competitive rates.
Would you like me to work up a quote for you?
As always, thanks so much for being a part of the ABC family.
6. Asking For Referrals
Once your relationship is established and comfortable, let your clients help you grow.
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You've been a valuable member of the ABC family for two years now, and we so appreciate your business–not to mention the muffins you supply for our monthly meetings!
Because you are a valued policyholder, I wanted to ask a quick favour. I know you are active in the local Chamber of Commerce, and I'm hoping you might know some colleagues who would benefit from working with our insurance company.
Referrals are one of the most effective ways to connect with our community since people really trust their friends, family and colleagues. Is there anyone you'd recommend I speak with?
Remember that in addition to business insurance products, we offer everything from life insurance policies to pet insurance.
As a thank you for your help, we will send you an Amazon gift card of $100 when your referrals buy insurance from us.
Thanks so much for your help!
7. Policy Renewal
If your client needs to renew their policy with you, send an email like this:
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I hope you're doing well! What a year it's been—from being listed as one of the top 5 bakeries in Dallas to being an official vendor for the city—you have so much to be proud of.
Just a heads up that your business owner's policy is up for renewal soon and will expire on June 15, 2023.
If you're still happy with the coverage, we can easily renew it for you.
Do you have some time to chat this week?
Looking forward to serving you again!