A deposit is something that you usually get when signing a client. But why are you doing this? Are you just getting a one because that seems like the smart thing to do? Or are you understanding what you are trying to accomplish by getting that one?
Do you know what your contract says about your deposit? What is the client reading in your contract about why they need to pay one?
These are all questions that you can make sure you know and understand when signing a new client. To know exactly why you are requesting a deposit and what you are going to be doing with it.
In general a deposit is seen as a payment by your client and more often than not a show of good faith towards the instruction. It is important to obtain a deposit from your client before getting started on the work. You do not want to end up doing work and then the client backs out.
You need to make sure that it is clearly stipulated whether this deposit is going to be. For example a rental deposit which you keep and it earns interest to the benefit of your client. Or is this deposit going to be a first instalment towards the payment. Is it refundable or non-refundable?
1. When should I get a deposit
You need to get a deposit from your client if you are instruction is project based. (this is by no means the only instance, but generally speaking). When doing a project for a client it would be over a longer period of time and the client will be paying the balance of the account in different instalments. If you are going to be using the deposit and it is not just going to be for safekeeping then you should make sure that you contract is aligned with this.
Another instance that you should be getting a deposit is for rentals. I know most of you are familiar with this but the reason for getting a deposit when renting a property is for the breakages or damages. You can see that this can then be the same as when you get a refundable breakages deposit. A good example is for Venues or Wedding and Event Planners who need to make sure that if there are breakages that you do have funds available from the client in order to pay for this.
2. How much should I be asking?
This is really going to be dependent on the answer to the first question – the reason for getting it. If it is for instance a breakages deposit it is good idea to have a percentage. This will help you secure a deposit that relates to how big the event is or the instruction.
If it is a deposit that is also going to be used towards your first instalment or payment of other items your contract needs say that. Also how big the balance payment is going to be. For instance if your are a designer you may request a 50% deposit, that will help you to be sure that you are covered for at least 50% of the work that you have put in, should your client disappear off of the face of the earth for some reason.
3. Deposits and First Installments?
You can use your deposit as a first installment, but the intention needs to be clearly set out in your contract. For example is the deposit refundable or is this going to be used towards the first installment?
Don’t confuse the two in such a way that your client think he is paying a deposit and then if he cancels half way through thinks he is going to be getting it refunded to him.
4. Should I be a nice girl and refund the deposit?
This is always a tricky question. I am a firm believer that your contract needs to govern this so that you don’t have to make an emotional decision and you can then always refer to your contract in substantiating your reasoning for making the decision.
But ultimately it is going to boil down to each scenario. If your contract states that the deposit is the first instalment, and the client cancels in the middle of the transaction: I would firstly have a look at how much work I have done. Also what I have sent the client, as in ideas and intellectual property.
If you haven’t done too much, a I would consider refunding the deposit. But also refunding is going to create a better relationship with your client for possible future instructions
But, ultimately I would take all of the emotion out of the situation and make sure my contract states what happens at any given time to a deposit or first installment.
This brings me to the final question…
5. What about when the Client breaches the agreement and the deposit?
Your contract should make provision for a cancellation penalty, you are allowed to charge a reasonable cancellation penalty in terms of the Consumer Protection Act. The key word here is “reasonable”.
Make sure that you are covered if the client cancels. If your deposit is stipulated as refundable, you would only be able to use that deposit for set off towards the cancellation fee if your contract makes provision for this.
With any situation of deposits, refunds and so on – your starting point is going to be the contract because that is where you have already decided what is going to happen in certain circumstances even before you have started an instruction with a client.
You know your business and you understand how things work and what are the problems and risks you are facing. So make sure that your contract actually reflects what your intention is. It is always good to have your business policies checklist to make sure that you have your legal stuff sorted.