How Mastering Client Payment Terms Can Make Your Business Unstoppable

Written by Charlotte Wand, Operations & Finance Director

Welcome to my Spark guide on navigating client payment terms. Hopefully, there will be handy tips for everyone, from freelancers to SMEs and client finance departments. This may seem a little unusual, as Agencies are usually talking brand, strategy or creative – but behind the scenes sits the operations and finance and when this isn’t working properly, none of the exciting stuff can happen! 

In the world of business, managing cash flow effectively is essential for success. One crucial aspect of this is understanding and optimising client payment terms. Whether you’re a freelancer, a small business owner, or part of a larger agency, striking the right balance between financial stability and client satisfaction is key.

In this post, I want to explore strategies for negotiating favourable payment terms, mitigating payment risks, and maintaining strong client relationships. I also shed light on the impact of unpaid invoices on small agencies and how to tackle them with grace and efficiency.

Understanding Client Payment Terms

At the heart of every business transaction lies the agreement on payment terms. These terms can encompass everything from when payments are due to the methods of payment accepted and any penalties or incentives associated with them.

At Spark we make sure the terms are outlined in the Statement of Work, which is sent over to clients ahead of a project starting. Discussing financials openly, honestly and right at the start of a project means there shouldn’t be any difficult conversations once work has begun. 

Recognising that every client is different is vital to us. Our terms are tailored to each client, there is never a one size fits all approach with us.

Negotiating Favourable Terms

Negotiating payment terms can sometimes feel like a delicate dance, but it doesn’t have to be daunting. Here’s how we approach it at Spark:

1. Clear Communication: Start with transparent conversations about payment expectations upfront to ensure mutual understanding.
2. Flexibility: Remain open to finding terms that work for both parties, understanding that flexibility can go a long way in building trust.
3. Payment Instalments: Breaking down larger invoices into manageable chunks can ease the burden on your clients while ensuring a steady flow of income for you.
4. Escalation Procedures: Have clear procedures in place for addressing late payments, including gentle reminders and, if necessary, more formal actions.

Mitigating Payment Risks:

Despite our best efforts, late payments can still occur. Here’s some methods on how to minimise their impact:

1. Credit Checks: Before entering into agreements, conduct background checks to assess a client’s financial stability and payment history. There are some great tools to help with this (we use Creditsafe).
2. Invoice Management: Keep a close eye on invoicing, ensuring accuracy and prompt delivery to avoid any delays in payment processing. We plot invoices into our finance charts at the beginning of a project, and check in as a team on a regular basis, so we are aware of any delays with plenty of notice.
3. Debt Recovery Strategies: Develop a systematic approach to debt recovery, including gentle reminders, follow-up calls, and, if necessary, escalation points to legal teams.

There are two other key considerations to help mitigate risk, but potentially not as simple to implement: 

1. Reserve Funds: Building a financial buffer can help cushion the blow of late payments and unexpected expenses. 
2. Diversify Client Base: It’s that old saying about not having all your eggs in one basket – relying too heavily on one client can leave you vulnerable. 

Fostering Strong Client Relationships

This is a biggie for Spark. We firmly believe the heart of everything we do is a strong client relationship. 

We also understand that talking about money can be difficult, so we try to separate this from the Client Services team where possible, keeping the financial relationship between myself and the client accounts contact or team. 

Here’s my quick guide on how to nurturing the relationship through effective payment management:

1. Personalised Approach: Treat each client as an individual, understanding their unique needs and preferences when it comes to payments. This feeds back to the start, ensuring you give them the right terms to begin with.
2. Proactive Engagement: Stay proactive in your communications, addressing any concerns or issues promptly to prevent misunderstandings. I know some clients are swamped and may have forgotten the invoices are due at the end of the week, so I am happy to drop a quick email reminder. 
3. Value-added Services: Go the extra mile for clients who consistently meet payment terms, showing appreciation for their reliability. 

The Impact of Bad Debt on Small Agencies:

For small agencies, bad debt can pose significant challenges. It can cause so much damage that a client may not be aware of – and that’s before I even mention the time and resources spent chasing unpaid invoices and potential legal costs:

1. Cash Flow Constraints: Unpaid invoices can strain cash flow, making it difficult to cover day-to-day expenses.
2. Damage to Reputation: Persistent late payments can damage your agency’s reputation, undermining trust and hindering future business opportunities. The knock-on effect to our freelance suppliers can be huge too.
3. Financial Strain: Loss of revenue from bad debt can put a strain on resources, potentially affecting business operations and growth.

Deposits for New Clients:

It may be slightly controversial for some agencies, but for Spark we request deposits ahead of work commencement with new clients. This is another step to help reduce non-payment risks and ensure a commitment from the client. 

My top tips for handling deposits professionally and transparently are:

1. Justification: Clearly explain to new clients the purpose of requesting a deposit, highlighting its role in securing their spot in your schedule and covering initial expenses. 
2. Percentage: Determine a reasonable deposit amount based on the scope of work and expected costs. Typically, deposits range from 20% to 50% of the total project cost.
3. Terms: Outline deposit terms in your contract or agreement, but include future terms for next stage invoices. For instance, we offer a range of terms after deposit payments from 7 – 30 days. We base ours on a range of factors, including credit scores.

Talking about finances isn’t everyone’s cup of tea, but keeping it open, honest and upfront, you can position your agency for long-term success. 

Remember, maintaining a balance between professionalism and friendliness can go a long way in building trust and loyalty with your clients. Here’s to building financial health and strong partnerships together!