Contracts Won't Save You, Dear Freelancer

Client stops paying; you have a contract. What do you do next? Since you're not a powerweight, can you do anything?

You've watched "F*ck You, Pay Me"[1]; you've downloaded a contract or two, maybe even paid for the MSA Bundle[2]. You might think the contract will save you in the event of $evilclient trying to stiff you on your last couple of invoices.

Let me tell you how it plays out: You're expecting that $8000 check any day now. You want to get that money. You NEED to get that money. Because #rent.

You've been putting off calling the client, hoping and pleading they pay. But they don't. You might even get the "Waiting on hearing from the boss" response from your contact at $evilclient, but no money.

Eventually you contact an attorney, because that's what Mike Monteiro Would Do. (WWMMD). The attorney tells you that $8000 is too few dollars to really go after and it would cost you about that in attorney's fees anyway. Further, even if you do get a judgement in a trial, a year from now, it's difficult to get paid. You: "WHAT!?!"

You've fallen into a legal sinkhole -- your outstanding invoice is too little to go after, but it means a hellalot to you. $8000 might be an entire month of revenue to you.

The story ends like so: you settling for $2000 and paying rent. Also, you'll be thinking about this situation years from now, wondering how you should have done it differently. Ask me how I know.

Contracts won't save you -- you need to have a workflow and system in place to prevent you from having your ass on the line. Protection comes in the way of risk mitigation of your most vital component in your business: cash.

From my consulting career, the absolute best way to make sure you get paid on time is to get paid beforehand. If you're not comfortable asking for that, try this:

  1. Ask for being paid beforehand.
  2. Failing #1, make sure you do not allow yourself to work 1 day past the client's deposit value.

Let's say your weekly invoice is $2000, and they paid a $4000 invoice, with net-15 on your invoices. The second the first invoice goes late, you should stop work. That means if you start March 1, on March 16th you must stop working[1]. Any work from March 16th on is work for which you may not get paid.

In this situation, your first order of business is to send an email to the client -- you might need this later. You want to reference the invoice, include a copy of it, and be professionally courteous. Catch more flies with honey than you do with vinegar and all that. Some sample text you can email your client:

Invoice #345 for $2000 was due on 4/15/2015, and is still open. Would you update me on its status? I'll be pausing work on the project until the invoice is brought current. The fastest way to resume work on our project could be to either wire me the money today, or for me to courier you a pre-paid fedex envelope -- you can drop the check in fedex and I'll get started tomorrow when I receive the payment.

If your client has the money, this will work - you'll receive funds and you'll continue on a mutually beneficial working relationship. This action accomplishes several things:

  1. You have let the client know that no work will continue until they pay.
  2. You are a professional and are running this engagement.
  3. You are giving the client a way to get you the money tomorrow (and give you a way to track and know about the payment). Waiting 6 days on a mailed check, with the client imploring you to start work because the check is in the mail, is for the birds.

If your client does not have the money: you stop the bleeding. It can only get worse -- you'll end up out tens of thousands instead of ones of thousands. I did not follow this advice, and kept working on a project with $18,000 outstanding for months. I did get the fairy-tale ending and received the money, but it devasted the working relationship between me and the startup.

Exceptions to the rule
If you're owed $50,000 or more - consult with an attorney; it's enough of a debt to start legal action over.

Consulting for the government (local/state/federal), is much less risky on a cashflow basis. Still, push for 60,70,80% upfront with some remainder on completion.

Large companies and universities: They most likely will pay late, but they'll pay. Also, they won't want to pay weekly. The same deposit calculations hold, just go with Monthly instead of weekly.

Small Claims - each state has a limit for what they call small claims court[4]. In Texas, it's $5,000; check with a local attorney on how easy it is to collect judgements (actually get cash in hand), and what the process is like.

Sidebar: With the $18,000 above, the client was a startup and didn't have the money. Had to raise the money. Prefunded startups make for extraordinally risky clients -- get that money up front.

Next time, on "tex mex": Why you should never, ever, ever, take equity as part of your payment.

Final Note: if you do have a legal dispute, consult an attorney. These tips are my workflow for trying to prevent legal disputes by making sure you get your money first.

[1] 2011/03 Mike Monteiro | F*ck You. Pay Me.
[2] Obie Fernandex's MSA bundle - served me well for YEARS.
[3] This math only holds if you invoice on the monday of your week. If you invoice on Friday (after you do the work) your deposit amount should have been $6000: Your March 6th invoice wouldn't be due until March 21, and that's two full weeks of effort. Your $4000 deposit would only pay for the efforts of March 1 - March 15th, not the 16th-20th.
[4] Small Claims Court Limits for the 50 States