Retainer? Deposit? Initial Payment? Expert advice from an artist-turned-attorney on how to structure payment plans in your legal agreements.
It may seem pretty straightforward, but writing payment terms into a legal contract is both an art and a science. It’s not as simple as trading dollars for deliverables, and there are many what-if situations you should consider when outlining a payment plan.
Payment Terms You Need to Know
Believe it or not, there’s a difference between a Retainer, Deposit, and Initial Payment. Let’s look at the difference:
Retainer
A retainer payment is an advance payment for services to be performed, intended to insure that the recipient will represent the client. In other words, a company secures payment from a client and then turns away other business because they’re holding that spot for that client. Sometimes, portions of retainer fees can be refunded if services end up costing less than originally planned, or can be used towards future services.
You might consider collecting a retainer payment from a client if you provide monthly, recurring services, for example.
Deposit
When you pay a deposit you are paying a portion of the price of a product or service. Paying a deposit shows that you intend to buy the product or service, and is often accompanied by a contract stating the same. This money is held by the company as a security measure, especially if a product or service won’t be delivered for some time. Deposits are typically non-refundable, and may be an additional cost to the full price of the product or service, though sometimes they are structured to be a payment towards the total fee.
You might collect a deposit, for example, if you have a waitlist and aren’t able to engage with a client yet, but they agree to a later start date.
Initial Payment
An initial payment is a payment made at the start of your contract. Typically, it's a larger sum of money that makes subsequent monthly payments lower. It’s simply the first installment made in a long-term purchase, and is typically paid at the start of an agreement.
For example, you might collect an initial payment when your client signs the agreement.
It can be a bit of a gray area. The most important thing is to keep your term choice consistent throughout the entire agreement — so don’t interchange “retainer” and “deposit”. Be clear about the amount you’re charging upfront.
If the terms used in your agreement are incorrect or inconsistent, you might be leaving your business (and your bank account!) vulnerable.
The 4 Corners of a Contract
Why are we being so particular about payment terms? It’s called the Four Corners Rule. It means the only legal parts of a contract are within the four corners of a page. It might sound like the courtroom-version of a dad joke, but it’s a real common law doctrine.
If evidence, verbal or implied agreements, or guarantees and promises exist outside of these four corners, they cannot be used in a court of law if they directly contradict the terms of the written agreement.
AKA: if it’s not in your agreement, it’s not protecting you — or your client. Include all agreements, expectations and terms in the original written contract. If you don’t, and rely on agreements made outside of the contract, enforcing them will be challenging.
Here’s an example: Let’s say a client misses a payment and upon closer inspection of their finances, now wants to renegotiate how many payments, of what amount, will be made on a certain schedule. You can exchange a few emails about this, sure, and you might even come to an agreement! But until that amendment to the initial contract terms is documented in a new agreement, it doesn’t actually exist.
Put simply: put it in writing. If you’re expecting to get paid a certain way, knowing which payment terms to use and how to structure your payment plans is necessary to fully protect your business. PS: we’ve got ya covered, grab our change of scope addendum or general contract amendment.
3 ways you can structure payment terms
There are a few things to consider when structuring payment terms. There’s no one right way to structure your payment terms — the most important thing is that both you and the client feel comfortable with the number of payments, dollar amount of each payment, and due date of each payment.
As a creative small business owner, you might consider:
- Cash flow: Offering extended payment plans might seem like a good way to close a deal, but it has implications for your bank account. Contracted revenue isn’t the same as cash in the bank, so if you have regular expenses to pay, you want to make sure you’re received enough income from your clients to pay them (and have some left over).
- Proactive planning: If you run a seasonal business (you’re a wedding planner, makeup artist, wedding photographer or wedding videographer) it’s in your best interest to book out your short season well in advance, so you might want to include a deposit in all of your agreements to create security and set yourself up for success to plan for travel.
- Client needs: If you find yourself always answering client emails and requests, in addition to the project you’ve taken on to support them, you might consider a retainer structure versus a project-based fee, to account for the additional time, energy, and expertise that goes into these communications.
Ways you can structure payment terms
Deposit
Deposit: $500, due upon receipt
Payment 1: $1000, due on DATE
Payment 2: $1000, due on DATE
Payment 3: $1000, due on DATE
Retainer
Monthly payment: $500
Initial Payment
Initial payment: $5000, due upon receipt
Payment 1: $1000, due on DATE
Payment 2: $1000, due on DATE
Payment 3: $1000, due on DATE
So, how should you structure your payment terms?
Think back to previous client projects. What are the situations that you wish you had been protected against? The learning lessons you can prepare for better next time? Perhaps you didn’t collect a deposit and a client cancelled their project with you, leaving you with an opening (and lost revenue due to an inability to fill it on such short notice). Maybe you offered an extended payment plan to a client who wasn’t financially secure, and they missed later payments, putting your own financial stability at risk. And we’ve all had that one client who loved to send emails on the weekends, or ask questions that were out of scope, draining your energy and capacity to better serve other paying clients. You have the ability to structure your payment terms to avoid these less-than-ideal situations in the future.
Next, think ahead to what could happen, or what you know is going to happen. Maybe you plan to take time off, and want to have projects ready to start upon your return. Perhaps you’ll have to step away from your business to support your family, and want to still see payments hitting your bank account during that time. Maybe you have a big purchase coming up, and having a few pay-in-full projects wouldn’t be the worst thing. You can structure your payment terms however you like! And, it doesn’t have to be the same for every agreement.
Additional types of fees to include in the payment terms of your contract
If you plan to collect payment for other expenses incurred in the process of serving your client, you’ll want to include payment terms for those items as well. A few examples include:
- Covering travel costs
- Reimbursing for software subscriptions or font file purchases
- Collecting cancellation or withdrawal fees
- Requiring proposal revision fees if your proposal process is lengthy and requires a lot of company resources
- Offering rush fees for expedited timelines
- Requiring licensing fees to use copyrighted material
- Additional photo purchases from a large gallery
Use the Four Corners Rule: if you want to get paid for it, put it in your agreement!
We won’t beat around the bush: a big reason why small business owners want contracts is to make sure they get paid. So, do yourself a favor and know your payment terms!
