Why you should avoid NET 30 billing terms

Patrick –

Even though we chatted about writing this article – great job! And I’m sorry about the massive length of this comment!

It is so vital that we as an industry (especially) freelancers think about these concepts and discuss them so people don’t get burned or at least are armed with the knowledge of what the risks are of extending credit and how they can take steps to protect themselves.

I want to add a few things to this discussion.

First, I think extending terms or not extending terms speaks a lot to holistic financial approach that people have.

I don’t think I’m divulging anything here when I say you are in general, very conservative financially – cash only, don’t use credit cards, don’t splurge etc.

So I think your extremely consistent on your approach with your feelings about extending credit to clients in this article.

i’m keen to read part 2 of this series and learn more about your hybrid approaches.

Even though you’re conservative financially, there are people who use credit leverage quite well – both on the giving end and receiving end. We can debate the morals of that but I feel like I’m in the middle when it comes to an overall financial philosophy.

Personally the way I run the businesses I’m involved in (and you elude to above) is much like a financial institution.

In other words it’s about track record, trust and the client building ‘credit’ with you.

We have a steadfast rule (like you) that any new job is 50% upfront, 50% on delivery or we don’t release the final elements.

But repeat clients that have built ‘credit’ with us (regardless of size) we extend terms to. I don’t think it matters the size of the company but rather the trust one has in that company i.e. payment history.

To build that credit we do exactly what you describe and I’m so happy you have brought up the 1/10 type net rules – that’s how clients build that ‘credit’ with us. And yes, clients that are large are bound by those discounts – great point!

Generally after 4-5 projects we’re at a true net 30.

Next, (I’m going to do an Insight on this) we operate with two contractual concepts – the service agreement and then a project order.

The project order defines the things in that project – TRT, schedule, deliverables etc.

But everything thing else including rights issues, termination (i.e. kill fees), payment terms, interest charges, the process of what happens for non payment including accepted payment schedules, mediation, and yes, the fact that after 180 days and refusal of mediation they will be sued and agree to cover ALL court costs regardless if they win or not is in that client services agreement.

That is my safety blanket.

We get EVERY single client to sign it – no exceptions.

In 10 years of running my post company, I can count a single hand the number of times someone has refused to sign it or modifications to agreement have been objectionable.

My point being that there is middle ground between not extending terms and just digging a ditch like your friend – contractually protect yourself.

I know what you’re probably going to say – ‘you can’t get blood out of a rock’.

Yes you are right. If ultimately you go to claims court and the client folds and establishes bankruptcy and you’re at the mercy of the court like other creditors and you’re claims are dismissed – yeah you’re screwed.

And yes, you have to ask was it really worth it. I get it!

But that is exactly why our client services agreement establishes payment schedules for non-payment, agreement to mediation etc. Incentivizing prompt payment in a number of ways.

You’re probably also thinking – if I charged 5k I want 5k! Payment schedules, taking a hit on credit card processing fees etc is unacceptable!

But for a client that that is 90 days late wouldn’t you rather have them reach out and build a payment schedule (hopefully for the full 5k) even if it only gets you 4k?

I would. I’d rather see something than nothing.

And I have no interest in ‘fighting’ I want to give a late client incentive to pay – and as you outline between interest, accepting credit cards etc there are a lot of ways to do that.

If you do get a partial payment there is something not enough people do – That loss can be written off for tax purposes.

Sure its not cash in hand but it does hold value to the bottom line of your company.

Regarding interest charges – you’re right that many people don’t do this out of fear and the percentages they assign are better then prime minus a few points!

Charge interest people!

We charge 10% interest per each 2 weeks of late payment, and that compounds.

Indeed, in our client services agreement we have a chart that shows a sample $5000 project and how the interest compounds for that amount.

Having that chart puts a little fear of god in someone just like how the bank shows you that table of how much you’ll ultimately pay on your mortgage!

And yes they’re agreeing to this PRIOR to the job starting because its in the client services agreement.

You make some really good points about the semantics of net 30 and terms in general and when they start.

In our services agreement we define the start period of those terms +4 days of date marked on invoice. While we generally email invoices these days, 4 days is long enough for an invoice to be mailed ANYWHERE in the country.

We don’t always put it on the invoice – but need to. Your article as made me think that start date should always should be on the invoice

Regarding the ‘real client’ and your client getting paid by the ultimate client – again simply contractual protection helps.

here is the clause from our agreement:

client agrees that they are bound to payment of services as described in section 4F and payment shall not be delayed or excused based on availability of funds from client or based on the availability of payment to client from a third party.

Ok one more thing I want to make you and everyone else aware of.

Why is extending terms a difficult decision?

Because you have no guarantee (read data) that the person will pay.

But how does that make you different then a credit card company or a bank? It doesn’t!

However, those companies use credit worthiness as an indicator of potential problems.

For large jobs we use a credit checking service – well, two actually.

Dun and Bradstreet for working with companies and Experian for individuals.

Both have plans for small businesses to do credit checks on companies or individuals that you wish to extend credit to.

I’ll have to dig up the exact cost figures but we’ve used this a lot recently with some large museum jobs. And its not really that expensive.

And yes, in our services agreement, we have a paragraph outlining that if requested the client will submit to a credit check to ensure credit worthiness

Now, I 10000% understand that the work to get a strong agreement like I have, costs a lot of money with a lawyer and that there are lots little things like the credit checking that can add up – but as they say – that’s the cost of doing business.

-Robbie

Awaiting P2 !! This is pure gold 🙂

I know of quite a few “million-dollar firms” that scoff at Net 30. Disney pays Net 90, last time I checked. As an indie freelancer, I get paid 50% upfront and 50% when the client receives the final files. No credit for nobody, not in this particular cesspool of showbidness.

This happened to me last year, I lost about £8,000 (currently that would be about $12,000) because I worked alot for one company doing Net30 and I managed to amass that within a period that fell between the payment dates. So by the time the first invoice was due I was already £8,000 billed. The company then went bust and it turned out they owed so much money there wasn’t any left after the bankruptcy to pay debitors.

Once the production company/post house went bust the broadcaster was able to recover the material and the show was broadcasted. Some legal advice I had was I could have gone to the broadcaster and claim copyright infringement under article 6bis of the Berne convention. Because I hadn’t been paid the rights of my work still belonged to me. But I decided against that cause could have end up as a court case if they said no and also I didn’t want to burn any bridges with the broadcaster who I do other work for anyway.

Ian – I’m sorry to hear about this. If you have a good relationship with the broadcaster it may make sense to talk with them. After all, they’re profiting from the fruit of your (unpaid) labor. Even if you get back half of what was owed… it would be worth your time.

In part 2 I’ll talk about some alternate ways of structuring deals for freelancers so you don’t get that deep into a single client… It could be as simple as they must cut a check every X number of thousand £’s—which will limit your potential losses. I’ll get more deeply into that in Part 2.

I’m with you brother. 80% of my clients are structured this way. But like Robbie, I’ve got a few clients that have built up trust with me and I’ve moved to a NET 30 deal.

Robbie – Great comment! And you’re a shining example of what needs to be done to extend NET 30 credit responsibly. So many freelancers are bullied into doing NET 30 / 60 and your approach is the perfect real-life example of EVERYTHING they need to do to extend credit like a professional… including not extending it on the first few jobs.

I also love the idea of showing how interest compounds on a $5,000 job. Terrific idea. And thanks for sharing how you charge interest. These are the things we all need to do if we’re to protect ourselves from clients who want to use us as a cash flow mechanism.

One clarification that our accountant drilled into us about charging interest: He says we absolutely have to state our interest rate and penalties no later than when we submit the Invoice. At least in NY / NJ it’s a legal issue if you try to impose interest after the client has been invoiced and after they miss their payment. I don’t know if that’s a state-by-state thing… but it’s smart to do up-front, no matter the laws of your state.

RE: Dun and Bradstreet – My only question about D&B is for smaller production companies that get formed for a specific project. They just don’t have the track record for D&B to be any good. I guess that’s when you do an individual credit check? I’d love to hear more about how those discussions go with clients, when you want to do a credit check on them individually and if you’ve ever declined to extend credit as a result of these checks 🙂

Robbie – I look forward to hearing about your two contractual setups of a Service Agreement and Project Order!

Again, thanks for sharing how you deal with NET 30 in your business. It’s a great example of how those business school grads talk about extending NET 30 if you’re going to do it. Just extending a client NET 30 with no controls surrounding it? You will be abused. 100% guaranteed.

Im not gonna confirm or deny, but Ill comment NET90 is the actual terms, not what the actual “average” payment ends up being in my experience working w a large studio. It also doesnt help that “Big iron” vendors like TCS, Deluxe, etc may be billing up to 6 to 12 months later for work. While they can handle that & studios allowed it, its impossible for a freelancer to survive w terms like that.

A story I know too well… Sadly, in my country, no one is paying when you deliver files/masters and everyone’s using some sort of NET.

Most productions used to pay NET 30 but with time, it’s slowly shifting to NET 45 or NET 60. If you’re working for a government organization, it might even reach NET 170 (yes, 170 day). Crazy. Of course, it is common to have delays in payement after the agreed NET period.

It was even worse until two years ago when you had to pay taxes on those incomes that you have not yet received from your customers. Luckily, a two-years old law changed that and we are now paying taxes based on received incomes.

Since NET is a de-facto standard, you won’t find any production here willing to pay at the end of a job and you are obliged to accept those terms because you know that everyone else is and everyone is scared to brake this cynical cycle.

Steve – what country are you in?

If you can’t break out of NET 30 then the key is to use the other elements I describe to make NET 30 work for you. Be sure to read Robbie’s comment below about how he executes NET 30. Robbie’s a great case-study on how NET 30 needs to work… otherwise you’re extending credit without consequence. And it sounds like you understand too well what that means.

Remember: Executing NET 30 like an MBA means building in a carrot (discount for early payment) and a stick (penalty for late payment).

And based on your comment, I’ll add a few thoughts to my next Insight on this about some strategies to move late-paying NET 30 clients to your new payment schedule.

A few years ago I took a project with a multinational athletic company. Their standard was Net45 and all new vendors take a few weeks to get approved and entered into their system. So I got paid about 2 months after invoice. This is the only way they would do business (but I was never worried that I wouldn’t get paid).

For another company I worked for, when the money was tight, all invoices with terms went to the bottom of the pile. Anything with “Due on Receipt” or similar, was paid immediately. Just that simple line on the invoice changed how quickly they got paid. I stopped offering terms after that. Also, terms with discounts were almost always paid immediately.

Exactly, or we do a 33/33/33, first third at start of project, second on rough cut approval, final N-10 of master delivery If I trust them, COD for last third on final deivery if new customer. Why is nobody mentioning either of these scenarios. I have never had a problem with clients paying this way. Watched too many folks getting burned with N30, and most of my problems were with larger corporations who insisted on N30 and went to 45 or 60… but those were pretty few.

And this is one of the cornerstones of Capitalism that is in dire need of reform. Net 30, 45, 90, whatever… These were put in place not to be administered as payment plans for vendors r workers, but as a method of financing loans given on Credit. Vendors are not creditors!

We do Net5 on short projects and Net15 on larger ones, with the very odd exception of Net30 for big AND long term projects. Additionally, depending on factors (company profile, payment regimen, and industry reputation) we require a deposit of 1/4 to 1/3 up front. This is the best (and honestly only) way to ensure a committal from the client that lasts the duration of the project, and ensures at the very least we get our dead operating cost out before final delivery.

If a client wont work within these constraints say ‘ba-bye’; we don’t waste time on clients who waste our time and undervalue our service. Life is too short.

I hesitate to post anything, because I am not in your industry and because this is several years later, but I thoroughly enjoyed your articles on this subject, and relish the fact that other people see this for what it is.

I have been providing Bookkeeping services for over a decade and this is one thing I want more small business owners to recognize. Many people who claim to be small business owners are really just owners of their “job” as opposed to a fully operating company, but enough of those are only ‘accidentally’ doing okay—and by that I mean their administration, oversight and organizational structure is functioning just enough to keep them from going in the red. But sometimes they either wait until it’s too late or they are absolutely unwilling to change their policies, even if it means they starve instead of eat.

Back in the beginning of my career, I was okay with working with that group, but no longer. Their high risk practice ultimately put me in a higher risk category than I want to be. There are enough people who are genuinely talented or offering a valuable product/service that perhaps don’t have the kind of nuts and bolts capacity for what it takes to get paid and keep their accounts in order (which is where I come in) and yet they recognize that it is their right to get paid…and not performing a charitable service. Personally, I consider the stewardship of time and money a high calling and one that isn’t to be regarded lightly, and I apply that same view to my clients’ time and money. If they value their time and money less than I do, then I know they will ultimately value my time and money less. This will not make for an acceptable working relationship in the long run.

For the past several years, I have been compiling and instituting a multi-level credit checking system to vet the people who want my clients to lend money. Depending on the industry and what part of the project a client plays, there are ways to structure invoicing, payments and terms, to suit my client’s needs. Having not worked with clients in your industry it would be hard for me to state where you fall in the line of your client’s ability to achieve their goal, but I would venture to guess that it’s pretty dang important to the final outcome. And for that reason, you hold a valuable piece of leverage—the finished product—which you mentioned. It’s great that you see this for what it is and kudos for being realistic about business practices.

I work as an independent contracter that does Net 30. But we have a specific date that we need to turn in invoice and then a specific date that they tell us they begin processing those paymetns. They also use a company calle Payoneer to help process timely payments. This last time there was a glitch of some kind and I understand it was the first time in years that people were late getting paid. But my guess is that Net 30 covers their but in this case. People were as long as three days late in getting paid.