Previously we spoke about financial planning for home businesses, all about the types of insurance you will need to consider, about what to look for when setting up a bank account, the importance of keeping proper accounts and records and how to use them to work out what your expenses are and what your rates and your wages ought to be.
Now we’re going to look on the actual transaction side of things. We’re going to talk about the different types of payment options available and the pros and cons of each, and we’re also going to talk about the various steps which you ought to follow to ensure you are always paid the agreed amount, on time, every time.
The primary consideration when it comes to getting paid is the question of how the payment is to be processed. Invariably this will mean either a traditional bank payment or via an online payment service such as Paypal.
For online payment methods in particular you will need to know which type of account is best suited to your needs and also all of the transaction charges involved. For example, with Paypal, which is still the most popular online payment method, there are four distinct Paypal account types; Personal and Student accounts pay lower fees but also have more restrictions whereas Premier and Business accounts pay higher fees but can receive more money in more ways. Having a Business account allows you to have more than one email address and/or user access the same account. This is useful if you have only one credit card but don’t want to use your business’ email address for private transactions or vice-versa. (Though, as mentioned previously, having a separate business credit card is greatly recommended.)
Exactly what account is right for you will depend not just on your situation but also on your country. In some cases you will be able to function perfectly using a Personal account whereas elsewhere you will have to upgrade to a Premier if your payments exceed a certain amount, it depends a lot on where you’re based. (It will also determine how much crap you have to go through during the account verification process, which can often be harrowing.)
For every transaction you receive in your account Paypal will take a cut. This varies again from country to country but is usually between about 2.9% to 3.4% as well as a second cash fee e.g. $0.30 US, €0.35. Your location will also dictate whether or not you need to pay additional cross-border transaction fees. And, as if all that’s not enough, you can also expect to get some woeful exchange rates through Paypal. As a consequence be sure and investigate your country’s specific fee structure carefully and then you can work out a fee structure to cover all eventualities. If you’re stuck check out this excellent Paypal fee calculator, which can give you a quick idea as to the costs involved. (Though obviously the rates can change so best keep a regular eye on Paypal’s site too.)
As an online payment method Moneybookers offers better rates and far superior customer service than Paypal. Where it falls down, however, is in its list of supported countries which doesn’t include the United States. Considering the US is still the country with the largest economy in the world it looks like we won’t be giving Paypal the heave-ho any time soon.
Escrow and Milestones
Starting off as a virtual assistant, freelancer or other associated home-based worker you would be well advised to start getting your first clients via online freelance websites such as Freelancer.com or Elance. As well as being able to easily find work on those sites you will also be offered additional protection in the event of a dispute. Some websites (though not all) also offer an escrow service where they hold the funds in escrow until both parties agree that the job has been satisfactorily completed.
Freelancing also serves as an excellent introduction to many of the concepts that you will need to familiarize yourself with such as the practice of using milestones. Milestones, as their name suggests, are a means of splitting a project up into different stages. Using milestones and/or escrow features on freelancer websites provide peace of mind to both parties. Once the price and milestones are agreed the buyer then has the option to release either a full payment when the job is completed or a partial payment when a milestone is reached.
Setting your own Milestones
Whilst sites such as Freelancer.com do offer an ideal marketplace for freelancers to find work, there are disadvantages. Using their service means you have to wait for them to process the payment. Plus there are the fees. Finally there’s the issue of control. You may find it faster, easier and more economical (not to mention a great boost to your peace of mind) to cut out the middleman altogether. Indeed many online service providers prefer not to go down the freelance website route at all and instead market themselves to, and deal with, their clients directly.
As anyone in the freelancing game will attest, however, projects sometimes don’t go quite according to schedule and sometimes there can be unforeseen delays. Imagine, for example, you’ve undertaken the design and development of a website for a company. You’ve installed and configured the relevant software onto their server, designed and created a unique template for them, added their content, search engine optimized it and now it’s pretty much all good to go. The only thing left is that they want to have a slideshow of product photos on their “Products” page just like they saw on another website. You’ve hours upon hours of work done and to create the slideshow you estimate another two hours tops but you can’t finish the job, or get paid, until you get those photos and, for whatever reason, the photographer doesn’t seem to be all that bothered showing up.
To avoid being caught by such a situation always insist on milestone payments. For example, make the installation and configuration of the software milestone one, design of the template milestone two, adding and search engine optimizing the content and hooking it up with the social network profiles milestone three and finally make the actual slideshow the final milestone. That way you don’t end up out of pocket because you have already gotten the bulk of the payment with only the small fee for the remaining work pending. Unlike the freelancer website escrow method, you the provider now have complete control and can invoice the client directly.
In fact, ideally, you want to work towards avoiding online payment methods as much as possible. Say what you will about banks and bankers, but at least they aren’t in the habit of locking your account or freezing your funds for dubious reasons like Paypal and Freelancer have been known to do.
As a business person you are going to have to get into the habit of being able to read and understand contracts. Yes you should always seek legal advice when you are uncertain but it is still in your own best interest to become as familiar as possible with contract language and usage. Don’t ever just let the other party dictate terms. If there are terms within the contract which you don’t consider favorable or equitable you are well within your rights to suggest changes. A contract is, after all, a legally-binding agreement between both parties, not just one side agreeing to the terms of the other.
A good contract should therefore provide protection for both sides and offer clear steps to resolving any difficulties which may arise. For your own sake the contract should bear the following in mind:
- It should provide detailed information on payments; everything as to how, when and how much is to be paid and what the full payment conditions are.
- It should protect you against non-payment and include information on deposits, cancellation fees and rush fees.
- It should provide full details on the scope of the project, full project specifications and project timetable and deliverables, including project milestones and full project schedule, when the project is deemed to be satisfactorily completed and what after-support, if any, is to be provided.
- Everything to do with costs should also be included, everything from stock photos to web hosting, shipping costs, transaction fees, the lot – spell it all out clearly so there is no doubt as to who pays for what.
This list is by no means exhaustive and, as laws change from country to country, you should always seek professional legal advice. Contract usage is a topic which, along with other legal considerations, we’re going to be returning to again and again on this blog. As home-based work is such a broad area it would take far too long to go into the different types of contracts for different types of work and there are other considerations beyond the practical and monetary, such as copyright, which also need to be addressed. For now, however, it is enough to understand how using contracts can protect your business and ensure prompt, hassle free payment. Then you can start thinking about what clauses you think you should discuss with your legal adviser.
Back in the 90s rap super-group The Wu Tang Clan coined the acronym CREAM; Cash Rules Everything Around Me. I can think of no better phrase for the budding small business owner to memorize.
If you want to stay in business make sure you have enough money to spend from one day to the next.
Forget about projected profits, forget what people owe you, forget everything, nothing is more important, in business, as the money you have in your hand (or wallet or bank.) Cash in hand is to business owner what The Force is to a Jedi. Loans, overdrafts, credit – to the Dark Side they lead. Forget about that stuff, this is hunker-down and brave the recession time. Build up and maintain your rainy day fund, monitor your spending and marketing ROI diligently and chase down late invoices with all the systematic ruthlessness of the Terminator.
One of the things they loved to teach in business school is the old adage that owing somebody money is a bad thing but being owed money is good. Such a simplistic viewpoint is partly the reason why the world’s in the mess it’s in.
Among the principal causes of business failure is having lots of money on paper but no paper money. Before when that happened businesses could just go to the banks to borrow more, until it transpired that the banks were just borrowing from other banks, because they had no paper money either. Then the whole world imploded. All of which could have been avoided if only people would remember the C.R.E.A.M. maxim and just pay their bills on time.
Seriously, pay your bills on time. It makes good sense for a number of reasons, firstly, purely for ethical reasons, secondly there’s the stitch-in-time factor, paying invoices sooner, rather than later, ensures that you need never get overwhelmed by them. Thirdly, it means you will always avoid late fees, where relevant, and so it saves you money. Finally, always remember that what goes around comes around. When you pay your bills on time the other companies you deal with will love you for it. Fostering a reputation for prompt payment means your suppliers will view you as a reliable, no-hassle person who’s great to do business with. On this basis they are more likely to recommend your services to other businesses.
Of course in order to pay those bills you’re going to have to first ensure that people pay you. This can sometimes be a challenge. Unless you happen to be Joe Pesci or Robert De Niro getting angry is only going to make things worse and so the issue is best approached with a carrot and stick mentality. The carrot is to offer incentives for swift payment. For example many companies offer reduced rates to those who opt to pay by their monthly bill by direct debit or standing order, perhaps you could offer something similar. The stick portion, meanwhile, are the aforementioned late fees and penalties for late payment, which, of course, should be clearly stated in your contract.
For those who don’t like the idea of ringing people up and demanding the money they owe it’s time to grow thick skin. Unfortunately there’s no other way than just to dive in and do it. The first time you might find your heart’s pounding but after a while it just becomes automatic. The trick is not to loose your cool, but to be persistent, dare I say infuriatingly so. Often people are just so snowed under or busy they haven’t gotten around to it, other times it’s just slipped their mind.
Then again there are times when people try to duck and dodge and generally deadbeat about when it comes to payment, in which case you just have to keep at it. Remember the old squeaky wheel gets the grease axiom. Who’s more likely to get paid first, the person who just sits back waiting, or the person who rings up every day and keeps sending reminders? Generally that’s all it takes for them to give in and pay the money and if not, then its time to threaten with, and if necessary deploy, the debt collectors be they national or international.
So there you have it, you’ve sorted out your payment methods, set your milestones for long projects, decided who pays what and when as per your contracts, you’re chasing up those invoices to insure a steady cashflow and you’re paying all your bills on time.
Congratulations, you’re in business.