How to get paid as a freelancer: 5 best payment options
As a freelancer, along with the choice to work independently whenever and wherever they choose, comes a certain level of insecurity in terms of getting paid on time. There are of course a number of ways to get paid, and so it is important to determine which method works best for freelancers in terms of managing their finances whilst at the same time maintaining good relationships with their clients.
WondaPay takes a look at five of the best options for getting paid as a freelancer below.
The invoice, sometimes known as ‘remittance advice’ is the statement informing the client what works have been completed, how much they are being charged, when payment is due, and states details of methods of payment.
On the point of when payment is due, clients generally expect to be able to pay 30 days from the date the invoice has been received. If a freelancer’s income and expenditure are set up to anticipate payment in 30 days then this is probably manageable, however, problems can arise when clients pay late and sometimes don’t pay at all.
Chasing late and unpaid invoices can be a major source of financial and emotional stress but there are a number of invoice software solutions available online that will do some of that chasing by automating the reminder process.
A deposit or payment in advance is where the client pays the freelancer a certain amount of money upfront in order to demonstrate their commitment to the project. If it is a valuable and/ or lengthy project, then it is advisable to take a deposit in advance. This is for two reasons: first, a deposit is a useful way to provide the freelancer with an income which is especially useful when project completion may be long and a final invoice some months away; secondly, a deposit is a good way to manage the risks of the project potentially floundering and to ensure that at least the freelancers' costs are covered.
Advance deposits of 40-50%, especially for parties who are unknown to each other, are not unreasonable. Where milestone payments are agreed upon, these advances can come down to 20-25% depending on the number of milestones.
3. Contracted Options
Many freelance professionals work on a retained basis which means that they’re paid a certain fixed amount each month in order to be available to complete works for their client as required. There is generally a defined scope of works that would be covered under a retainer-type agreement, with the acknowledgment by both freelancers and their clients that special requests outside the scope will be costed and charged for separately.
For such an arrangement, it is advisable that both parties consider their respective obligations to the IR35 regulations.
Again, examples of retainer contracts can be found online.
4. Account Receivables
Also known as factoring is where an accounts receivable management service will pay a freelancer immediately the amount shown on an invoice, that would otherwise be presented to a client, less a percentage fee. The factoring firm will then seek payment from the client. Such a service can be useful in easing cash flow by making funds available now rather than in 30 plus days.
Unfortunately, factoring can give the impression of a supplier (the freelancer) experiencing some sort of financial distress - which can, in turn, affect the confidence of clients that a freelancer’s business might be in a precarious state and could fail midway through a project. There is also the additional problem where factoring firms can often be aggressive in pursuing freelancers’ clients for payments now owed to the firm - which could affect freelancer-client relationships.
An escrow service is a secure deposit holding account that can be used by parties who want to ensure that payment is only released on project delivery.
An escrow service is most ideal where parties are not known to each other. So if a freelancer insists on an upfront deposit but the client is concerned that despite paying the deposit the freelancer may not deliver the work or worse still, run off with their money, an escrow service can eliminate these anxieties by protecting the payment until project completion.
The additional advantage of escrow is that the held payment can generally be released immediately - meaning freelancers can get paid in minutes instead of having to wait 30 plus days.
One of the main priorities for a freelancer is to be able to earn a predictable income, in terms of the approximate amount and when this is received. So whilst a number of payment options have been discussed it is not necessarily the case that only one option is correct, rather a mix of methods can be used depending on the circumstances that suit the needs of freelancers and their clients.