Every project carries risk, but some leave you so exposed that one missed payment could spell disaster. In these cases, asking for a customer deposit lets you accept the project with the knowledge that if something goes wrong, you’ll still be able to recoup your costs.
When to Ask for a Customer Deposit
Generally, there are four scenarios where it’s acceptable to ask customers to pay in advance.
- The customer has poor credit. Some customers may not have an extensive credit history ‒ new business owners, for example. Instead of turning them away, ask for money upfront. It not only protects you against a possible loss, but the more invested the customer is in the project, the less likely they are to cancel down the line.
- The project is expensive. Some projects have high up-front costs. Asking for a customer deposit ensures you have enough cash on hand to purchase necessary supplies.
- The project requires customization. Custom goods are expensive to make and hard to resell. If a customer requests them, asking for cash ensures you’re protected if something happens.
- The customer asks you to set goods aside for them. Reserving products to sell at a later date hampers your ability to make sales in the present. Deposits provide cash flow until the customer is ready to accept delivery and protect you from the risk of cancellation.
- The project will take a long time to complete. Projects length varies. Some take a few hours; others last for over a year. If you operate a small business, delaying payment until the end of the project is far too risky. Asking for a customer deposit guarantees you’ll be able to keep the lights on while you’re working.
The size of the deposit depends on the risk you’re taking on. 10‒50 percent is typical. Ask what seems right to you. However, keep in mind that some states limit the amount of money you can ask for, but only for certain industries (ex: construction). Therefore, you may want to consult with a legal advisor before requesting a customer deposit.
Instead of asking for a lump sum, some businesses use a pay-as-you-go structure. Customers pay as benchmarks are reached, ensuring steady income throughout the project’s lifecycle.