I am sure that you have heard the saying that Cash is King. For a business, cash flow is its gasoline. Without cash, a business stops operating. And this is one of the reasons why you should be requesting advance payments from customers.
In this article, I want to explain all the reasons why you should be requesting advances. I used to be the nice guy telling customers that they could pay me later. This got me into all sorts of trouble.
I attracted the worst type of customers, the flaky buyers and the types that always seemed to be broke, but they were waiting for a ‘payment to come through.
I now know better. Whenever I start a new collaboration, I always ask for an advance. I may be a bit more flexible with older customers, but I request cash as much as possible. I have compiled a list of reasons why you should be asking for advance payments from customers:
Get the customer invested in the project
Whenever you start a new project with a customer, you want him to be fully invested in the project’s success. If he is told that he can pay later, he might deliberately delay the completion of the project to ask for more and more things.
Once a significant amount of money has left their bank account, they tend to get worried about the project’s success. For example, when I run construction projects, the customer will bend backward to accommodate my requests once he has paid the advance.
But we could use the same example for a digital project like web design. A customer is far more likely to send over the requested material once he has paid that advance payment. When the customer parts with money, he suddenly has skin in the game.
Advance Payments from Customers provide insurance
Shit happens when you run a business. A significant customer delays the payment of his invoice. Facebook shuts down your account, and you have no way to advertise. Or an entire batch of products needs to be returned and refunded.
An advance payment can sometimes provide that unexpected cushion that gives you extra breathing space. Several times in my business, I have been short on cash. And every time, it was an advance payment from a customer who was unrelated to the problem that bailed me out.
The advance payment finances the actual project
Perhaps the most apparent reason you should ask for an advance payment is that you need to finance the actual project. You are going to need to pay your staff to execute the project. You may need to buy supplies to finance the order. Or maybe parts of the project require the contribution of subcontractors. You should be able to cover these expenses in advance.
You should not need to dip into your reserves or ask for a loan to finance your project. The person who has hired you should be paying for the project. If the project needs months to complete, ask for scheduled payments according to agreed-upon deliverables.
Any project you take on should also allow a significant profit margin. So in the rare case that the project does go south, you will at least have covered most of your expenses. Do not get stuck in a low-margin business.
Qualify the prospect by asking for money
Ever had a customer tell you that “money is not a problem” or reassure you, “don’t worry, you will get paid”? Well, let me tell you, after 15 years of collecting money, these are the customers you should worry about the most!
By asking for an advance payment, you check to see if the customer is the real deal or full of shit. Customers who can’t find enough cash for an advance are bad news. If they don’t have any money now, they won’t have any money when the final project is delivered in two months.
Moral of the story: You should always be asking for advance payments from customers!