My experience is that the customer doesn't really want to pay more than they originally agreed to and your late fees seem high enough to just tick them off. I usually just keep on working for a few more weeks then stop working on it. This gives them a little buffer to pay and if they want to stop or don't like your work it makes it easy for them to do that.

I guess that depends if your work for the client is progressive or is one project that ends when it's completed.

If it's the former, your suggestion Anonymous would work, because if they don't pay you then you don't do any more work.

If it's the latter, however, you've sunk god knows how much time finishing a project to completion to then have to spend more time chasing up the payment. Clauses like weekly percentage increases are often the only defense freelance workers, particularly UK-based ones in my experience, they have. And this is for everything, from web design to plumbing.

If the client doesn't like it, you have yourself backed up with all the paper work.

There are laws in your jurisdiction about the maximum late penalty you can apply. This rate would count as usury and may be a criminal offense.

If your late fees get that high, your client may have grounds to argue that it is usurious. I'd consult a lawyer in your jurisdiction to make sure you don't open yourself up for a law suit.

As long as your clients well understand your payment terms before they hire you, that's fine. Whatever works. I worked for a small company for eleven years, and 60 days was fairly standard for payment to suppliers. Mind you, 60 days was also what we expected of our clients.

I face the same issues as a freelancer, I see a big hole in the logic you applied the problem which is that whatever problem the client has in paying you promptly is remedied my imposing a penalty system on them. The client seems incentivized to ignore the penalties too. Can you comment on whether this works? It would seem short of filing a lawsuit you don't really don't have much recourse.

Freelancers should unite and pay into a fund like insurance where the risks of clients are spread out and the benefit should it be needed is you get a lawyer to send nasty letters and/or litigate. I can't afford a lawyer to go after every client that doesn't pay so I'm at there mercy and I think they know it and take advantage of this.

Good idea. I guess I will start using that from now on. Luckily I havent had that problem before. Good post btw.

My experience in freelancing as been simple: take 50% down, non-negotiable. Otherwise the other side is not invested.

When I used to freelance, I didn't use a kill switch or charge extra for late payments, and I only ever had one person out of a hundred maybe who didn't pay.

I think the best thing you can do is get a feel for the person early on in your dealings and also get half up front. If you have suspicions about the person, you can always request all of the money up front.

In the end, it is so expensive to go to court over a contract that it simply comes down to a handshake. If you don't trust the word of the person across the table from you, don't work with them.

Your idea is a sound (and fair) one, but your interest rate is too high, and you should include a clause about not charging interest if anything is disputed and payment has been deposited with an escrow service.

I hope your clients are actually agreeing to this and you are not just surprising them with your "standard terms" when they get the invoice.

You'll find that in business 30 days is the standard term and most companies don't write checks till 60 days. Also charging 10% interest per week is illegal in most states.

I'm not sure that an overly harsh/sudden is the solution to late payments.

There are 2 things that I find keep this in check:

- Having a signed contract in place on EVERY project. Small businesses take the threat of legal action very seriously, so this must be in place in any deal.

- Threat of ending this client relationship. I have a 10% late fee after 30 days. If I must invoke this more than once, then this client will no longer be my client. A web designer/dev has enough demand that they shouldn't have to deal with clients who don't respect their terms.

for a SME-sized view of how things work in the UK. roughly, there's a specific law about late payment of commercial debts that sets a statutory interest rate and fine if a payment is missed, and cannot be contracted out of. http://www.paylate.co.uk/enforce.html gives some actual cases that these people have taken to court to enforce.

Reminds me of this presentation;

http://vimeo.com/22053820 Fuck you, pay me. Great watch

The best way to handle the problem is to use an escrow service like escrow.com. This way you can get all the money up front but it won't be release to you until you're complete and you can't be taken for any money since you can alert the escrow service and they will release your money as long as you've completed your project. Easy!

The problem with 50% upfront and escrow is that they don't take into account that all software projects actual scope is always larger than estimated scope, and sometimes by a lot. People change their minds a lot when it comes to software. Related to this issue is having fuzzy end dates. Sometimes it's uncertain when a project is finished.

You should charge interest on interest. Because now, assuming 3% interest in the bank, your client will break even after 242 years of not paying, after that, it gets only better for them.

I ask for 30% down to show they are serious, one or more milestones totaling 40% when private beta is delivered. And 30% at the end. This eases possible cash flow problems for the client and also dampens the risks for both of us.

I had problems with most (if not all, now thinking...) projects that were supposed to be payed 100% at the end, with all sorts of excuses.

I like the late fees, but there is a better idea that can be used instead of or in addition to it without the kill switch.

One is that you get paid before you do the work.

Two is that you show them the finished result, so they can approve it and such without actually giving it to them. Setup a demo server for a web app, or give them a demo in person. Only hand over the product after they give you the cash.

The first thing that I do is CALL the responsible person at the client company and talk to them. In larger firms, they often don't know that their accounting department is holding things up.

If they don't expedite matters, I then explain that this impacts my cash-flow, and that I may have to ask for pre-payment or take their Visa details and bill them that way (yes, it costs me 3% but I tell them that I'll add that to their bill).

The big thing is to talk to them about it, not just impose unilateral and often illegal late fees.

If you presented me with a contract that said 10%/week late fee. I would insist it be changed, and if you refused, I would NOT do business with you.

You sound like a pain in the ass to deal with.

Cough, BULLSHIT, cough

I hope, for your sake, that you informed your customers of this before completing the work. If the terms are just on the invoice, then they aren't enforceable.

Construction, Electrical and Plumbing Contractors and Patent Lawyers typically ask for a DEPOSIT FIRST.

It should be the same for Software Development.

MONEY UP FRONT FIRST, just all other trades...

And structure the contract in at least 4 stages or more....

NEVER DO 50% down and 50% upon completion, even on small projects as all projects GROW...

It's all about leverage, I suppose. Once the website is up and running, and they have full access, there isn't really an incentive for them to pay you. But if you hold your work hostage, they'll figure out how to get your money. This works especially well when you require 50% up front, because they have already invested, and can't just walk away.

What you withhold depends on the project:
*Could just be the admin password.
*Just block search engines from indexing the website with robots.txt
*Don't upload the application to production.
*Don't deliver the watermark-free hi-res graphics/videos.
*Basically whatever works in your situation, and is quick to deliver as soon as you paid.

I have a simple solution - I only ever build the websites on my development server (accessible to the client). I deploy the site when they pay and not before. I make them aware of this before I start, and will issue the invoice in advance if they need to launch ASAP to get around any 30 day limits on invoice processing in companies etc.

This way, I never get screwed and I always get prompt payment at the end of the project.

Which jurisdiction are you working in Sam?

Anyone in the UK attempting this would be squashed bug-like; late payment interest is set by statutory powers and is currently 8.5% per annum plus some relatively small standard penalties.

The statute: http://www.legislation.gov.uk/ukpga/1998/20/contents

Penalty and interest: https://payontime.co.uk/late-payment-legislation-interest-calculators

You've got a lawyer, right? Take a look at the contract you signed with them. They'll include a late fee clause. Usually it's about 5% after 10 days, and includes some wording as to how this would be assessed and paid. Lawyers know how to get paid even if their work is already completed and delivered.

You don't need to hold your work hostage or charge insane late fees, instead follow what your lawyer does.

Another tactic lawyers use is an upfront retainer, usually 5-10 hours of work. This ensures that if your client flakes at the last payment (common) you can at least get something back from that retainer. if not, they get the retainer back at the end, or can keep the cash with you for future problems.

Not sure about AU laws (and IANAL), but late fees in the US can't be arbitrary or punitive. This means in court you may need to demonstrate your fees are to recoup costs in recovering payment. Most states have laws with strict usury rates for credit and lending, but late fees on goods and services are considered separate.

Talk to an attorney. You can do this but you have to do it right. Don't call it a late fee, call it a pre-approved performance penalty on their part.

Do you not take down payments before starting projects? That's helped me quite a bit.

I'd say prepay a portion if its a concern.

Also, the idea that you would have better luck collecting the 150% of an invoice from a late (likely insolvent) payer would not work out in your favor. Filing suit would likely result in less of a loss at that point. Further, as a previous poster stated, there are usury laws that determine the maximum allowable late fee.

Good luck.

I'd say prepay a portion if its a concern.

Also, the idea that you would have better luck collecting the 150% of an invoice from a late (likely insolvent) payer would not work out in your favor. Filing suit would likely result in less of a loss at that point. Further, as a previous poster stated, there are usury laws that determine the maximum allowable late fee.

Good luck.

I'm not sure how they do it where you live, but in the U.S. that high of an interest rate might run you afoul of various states' usury laws which limit how much one could charge in interest fees.

While I understand (and empathize with) your sentiment, in most countries the interest rates you suggest here would be subject to usury laws.

Freelancers like you give the rest of us a bad name.

I've been doing this for 12 years now and have never once, not even once, had a client make a late payment. Fortune 100 clients, mom and pop shops, governments- always on time. Why? Because we discuss terms up front that are reasonable for them, and most importantly-

I CHECK REFERENCES ON ALL CLIENTS.

If a client has a history of late payment, I won't work for them.

If they have a history of slow payment, I disucss that with them up front and set terms that fit their schedule and needs. Bottom line- they're hiring me to fix their software and neither side wants to screw with accounting. Get it all set up front and everything goes smoothly.

Your attitude and the usury you impose on your clients reflect poorly on all of us. You, sir, need to check references on your clients, and not assume that your invoice is the biggest, most pressing thing in their ledger.

You should be transparent to the business side of your client. The engineering folks hired you and they're not going to be skilled with accounting, or want to spend even one iota of their time getting you paid. Be a professional and stop making the rest of us look bad.

People should set-up a trusted 3rd party.
1. Clients should deposit their money to the 3rd party.
2. The 3rd party will hold the money and ask the freelancers to start working on the projects.
3. After the clients get the finished projects, the 3rd party will pay the freelancers the money which is held.

This way may make the whole payment process a little bit fair.

As others have pointed out this is almost certainly usury (I say almost certainly because I don't know where you are or what the laws are there, but the rates you describe would basically allow for loan sharks to work within the law and I know would be illegal everywhere that I've lived)

Sorry but that won't work - you'll get crappy references even if you did good work - and as time goes on you'll need references. Having done product and marketing consulting for years this has always been the bane of my existence. And the larger the company the worse they are - because whoever gave you the contract is insulated by layers of management from the the accounting office. They always hide behind the " sorry but I'll bug the accountants for you - but you know how they are,they have policies"... One very large networking company I have done work for routinely pays contractors 90 to 180 days out. Think about that -they push your rates down then they jerk you around on payment. This is their way of being "smart"with their money I'm told.

In the end I have worked for decent small and medium sized firms that were honorable - some had issues but eventually paid - a couple never did. But what you DON"T want to do is go stick in a kill switch - I know of a major phone company billing software vendor that did this in the 80's and it worked out for them when Venezuela tried to screw them but for anyone else thinking about this - the minute it gets out - no matter how genius you are - you will never get a reference for work. The only solution is to pick your clients well I guess, otherwise all you have left is small claims court and writing it off as a loss on you taxes next year. I honestly hope you can get someone to buy into the 10% fee but I seriously doubt anyone would agree to sign a contract with those terms.

I don't disagree with you but those will be very difficult terms to enforce.

You are very nice with your terms. I'm much more strict. First timer customers: pay every week on Wednesday. 5% a DAY for every over due (Not paying is not respecting me and my time). After a week of not paying - 50%, reverse the current code to previous version.

Those "rules" are for the first 2-3 months. Sorry I prefer to deal with receipts then with my wife :)

After 2-3 months, payment is due on the 15th and the 1st - again I want to feel secure with the money. (I need to pay for other providers too)

All of this is coming from experience, I dealt with so much project over 15years (I'm outside the us but most of my clients are Americans).
For some reason, from my experience, most Europeans are much more respectful to money, then the avg american client.

I wish there was a place where all freelancer all over the world could discuss those issues and warn you about bad clients.

RE Anonymous: "Construction, Electrical and Plumbing Contractors ...MONEY UP FRONT FIRST, just all other trades... And structure the contract in at least 4 stages or more.... NEVER DO 50% down and 50% upon completion, even on small projects as all projects GROW..."

Can you give some more insight on this, I currently do 50% first, but also struggle with your point of scope creep. Would love to get more insight from you on this if you can. If you don't want to reply here you can contact me via the link on my name :)

From a quick google search (shame on anyone who didn't bother before mouthing off) it would appear that there are no usury laws in Australia so no caps on the interest you can charge. Collecting is a whole other issue :)

"I wish there was a place where all freelancer all over the world could discuss those issues and warn you about bad clients."

http://madeforpeople.net/ux/2012/5/8/the-worlds-most-shameful-invoice.html

The way this works for most companies is that they invoice a higher amount but give "net term" discounts for earlier payment, like "10% 10, net 30" meaning the payer gets a 10% discount if paid within ten days, or pays the full/net amount afterwords, due in 30 days. So instead of charging $100 and asking them to pay in ten days and handling late issues ad-hoc, tell them "$120, 20% 10, net 30", or something like that, with a large enough price increase and discount that they will be sure to pay within 10 days. [1] http://en.wikipedia.org/wiki/Net_D

how do you calculate risk reward? Like what if someone wants a 10,000 job will you take it in chunks of 3000 or do you just do hourly billing. The difficult and awesome of contract work is the felxibility.

Well... good luck to you is all I can say. As a freelance consultant for 24 years now your terms and late fees seem ridiculous. That said, you can so often get away with anything - price is something someone is willing to pay.

As a respected consultant though, my terms are 30 days and 3% 30 days late (that is much higher than borrowing money, so you are making a great profit if they pay late, even at 3% per month).

Many business and especially government are even harder. They are usually 30 days after the end of the month the invoice is received (e.g. 45+ days). Pretty normal business.

Mostly though, if you can't get your Sh*t together to cope with waiting 30 days for an invoice, what are you doing wrong? Maybe you can't save money, you spend it as it arrives. Maybe you are not saving for the future. Remember you have to cover sick leave, long service leave, super, loss of work etc. If you are so tight as to only be able to wait 10 days for income (which is less than normal wages) you will be in trouble first time you are sick.

So I consider this blog post as a naive attempt at trying to change invoicing practices for the 99% of people that are happy as they are. And I consider your late fees as insanely greedy.

I understand your pain and frustration. Freelancing has lots of enticing attributes: freedom, variety of work, the challenge, the opportunity to wear different hats. But all these wonderful perks quickly diminish in significance when you're forced to deal with a client who feels paying for services rendered is an optional affair.

The only advice I can provide is try to work with people you know, friends, past colleagues, school mates. Start with your Linkedin network and branch out from there. Also, meeting prospective clients in-person is crucial if no established working relationship exists. It's impossible to gauge credibility otherwise.

Good luck!

I also do the 30% down, 40% upon completion, and the rest a little afterwords. But if its a new client, I invoice double and give 50% off if it paid within 30 days. I also over quote by 30%. I've only never been paid twice in 10 years. If a client is late on their payment I just politely remind them that cash flow is important for my business and they usually cough of the money, eventually. I also tell them I rate my clients by their ability to pay on time and priotize their work. And I check references.

This would simply be unenforceable in the UK, it isn't legal.

Seems like your strategy doesn't encourage long term relationships. You must already be very busy that you can toss away deals you've already closed. Times may not always be so fat.

I'm not a lawyer, but this what I could find from googling and wikipedia.
If you work in California OR Texas this is not allowed by courts. 18% per year seems to be maximum in texas. And in California its "reasonable" rates where probably over 18% is going to fail. http://answers.google.com/answers/threadview?id=32733
And these kind of interest rates mentioned in the article can land you in the prison for upto 2 years in Finland. And is US you can quite easily make another mistake and land in jail for 20 years as a mob boss. As its one out of two required in long list to get that sentence. One thing you should really pray for is that you have never infringed any license of any library you have ever used in any of your code.

Good stuff Sam. As you mentioned, customers are able to negotiate other terms, do you find customer feel more apt to pay you up front so they don't accidentally slide into the past due pile? I like that you run a strict policy, probably makes a huge difference in your DSO.

Hey,

Happy to read your article.Let me know a thing about late fees.

Suppose someone goes to Honolulu for honeymoon and come back after 1 months. now IS it OK that you make them charges 150%.

I am sure you are doing Freelancing offsite on a website not go directly communicate with client. in this case you can just make a comment at the end of contract or somewhat claim that this is late payment but never got any kind of late-fees.

What about making a list of people who not pay or pay very late and give them work late as they do.

I think in my country such a high additional fees would be considered unreasonable by a judge.

Not to mention the fact that you can only claim these when YOU can proof that the customer received the invoice in the first place.