Getting untangled from “Net-30”

If you are a freelancer or run a small company, especially here in Israel, you no doubt run into the painful experience of getting paid over a month past your invoice date. Primarily the custom of larger companies and the government, invoices are paid in the first few days of each month. Now, if you submitted your invoice on the 17th got paid on the 1st of the next month, it wouldn’t be terrible. But it’s another thing when work completed on, say, the 3rd has to wait nearly a month. And even worse, some companies inexplicably take this one step further and use shotef shloshim (a “delayed” Net 30, or, gulp, even Shotef 60!) as meaning 30 (or 60) days after the end of the month in which you submit a bill. In other words: Work completed January 10 is paid for on March 1 (the “30 Day” clock only starts February 1). That’s a long time to wait.

The logic is based on an inappropriate extension of very specific (and irrelevant) businesses scenarios: When physical goods are passed up the supply chain from the raw-materials supplier to manufacturer to wholesaler/distributor to retailer, each player is waiting for the cash to start trickling down once the end-product is bought by the consumer. And since consumers don’t necessarily buy merchandise the minute they appear on the shelves, the idea is to give the retailer a month to sell, and then the payments work their way back down the chain until a fraction reaches each middleman or provider.

But for small businesses like mine providing remote services (creating videos, writing, business plan consulting, ghost-blogging, site/logo design, etc.), this makes little sense: The services have been rendered. Your client, the company receiving the service, isn’t waiting (usually) for anyone to sell the a specific product to a consumer. There’s no supply chain. Can you imagine telling your barber, “Thanks for the haircut…I’ll drop by with the check in a few weeks”?

Nonetheless, the practice endures. And the obvious challenge is, especially when it’s a big job (say, one that took a full month), you need to eat and pay rent or, in the case of a small business, pay the employees who did the work. If every job you took paid you double those expenses plus some additional profit, you’d just cover the gap after a couple of initial months by keeping funds in the bank to cover these delays. But it doesn’t always work like that for those who live on revenues earned month to month.

So here are the methods I’ve used – successfully – to handle this challenge:

1. Get it on the record. On your proposal document, clearly write “Payment due immediately/within X days upon completion”. Aside from being the simplest approach, in my experience, often the manager signing the agreement doesn’t even pay attention. And to their credit, every Israeli company I have later confronted with this signed agreement (upon getting the “Oh, we pay Net 30” line) has consented and had the payment expedited. If they do object prior to signing, it’s a chance to explain the difficulty it presents for you, and either negotiate a shorter term or… go on to #2.
2. Take a deposit. It’s always good practice to take a deposit when starting a job (we ask for 30%). If the company demands a painful payment schedule, simply up the deposit to, say, 50%. Oddly, there is usually little resistance; clients aren’t as much concerned about the amounts, but more about sticking to the routine processes that the accounting department has in place.  If you are charging by the hour, and there is a rough estimate that you and the company can agree to, simply ask for a deposit based on the sum; since the projection is inexact, both you and the client are taking a risk of the deposit being a bit high or low.
3. Adjust your rates to cover. Be very up-front and explain that you need to add, say, 25% for each block of 30 days beyond a reasonable one or two-week payment. If they say that’s too much, compromise down to 15-20%, if you can handle that. At the very least, it highlights the seriousness of the issue and leads to a solution you can live with.
4. Set up a credit card payment system. This one’s clever. Many companies have a threshold under which a manager is authorized to immediately charge money directly to a credit card (which the company pays at the end of the month anyway). Paypal will do it, as will others. Yes, there is a charge of a few percentage points, but often it’s a lot less than you’d lose on bank interest or cash flow angst.
5. Bill early. Get agreement (by email, so it’s on the record) that you will be submitting the final invoice not at completion, but at a specific, verifiable milestone toward the end of a project. This way, assuming there is sufficient trust, and the milestone demonstrates the quality of your work, they can submit it to get the clock ticking. This really doesn’t endanger the client because you aren’t going to get that payment before it’s over – if the project goes sideways and they aren’t ready to pay, they can stop the payment process. This just gets the “Net” cast. This solution works because the manager loses nothing.
6. And finally, yes, turn down the client. I know, it’s easier said than done, but there are the factors to consider. First, often just mentioning this possibility is enough to make them realize how serious you are and triggers a negotiation…especially if they have spent a lot of time spec’ing out the project with you. It’s happened to me, and ended well, at least three times; I’m very honest about the fact that we are a small company and instead of charging all clients extra for that padding in the bank account, we keep prices lower and simply ask to be paid upon completion. Though this tactic is a last resort, keep in mind that indeed this may not be the client you want, if it’s going to put you under serious financial strain.

Do you have other tactics that work for you? Approaches that fail? If you decide to adopt some of these, let us know how it works out in the comments below.