What Are Upfront Payments and How Do They Work?

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.

Pros

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.

Cons

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.