The Best Way to Contract and Get Paid as a Service Business

Years ago when I operated my documentation and training business, we did work for a customer. At the end of a billing period, usually a month, we sent the customer an invoice. We waited for the customer to create an accounts-payable from our invoice and get around to paying us by check. It took an average of 70 days or more from the first day we commenced working to get the payment.

Once we received the check in the mail, we manually recorded the payment in our accounts receivable and made a trip to the bank to deposit the check. Then we had to wait a few more days for the check to clear and appear in our bank account. In total, it took about 75 days to have the cash available.

For a small business like ours, the time between doing the work and having the money at our disposal was financially crippling.

When we accepted a new project, we had to make sure we had enough cash or access to a line of credit to pay all the project expenses including payroll for at least 75 days or we had to decline the work altogether.

Many entrepreneurs leave corporate America and assume that this is the way all transactions work. While this is still the case often if the customer is a large corporation, most small businesses serve consumers or other small business that operate differently.

Contract

I’d like to start by discussing how the large corporate contracting process is different from what most entrepreneurs will experience today in their small businesses.

Let’s begin with the fact that a small business is not the same as a large corporation. Large corporations have lots of assets to protect and are the subject of many lawsuits. As such they have corporate lawyers and purchasing departments that develop long and complicated contracts that no one, except the lawyers themselves can understand, to protect them.

As a small business using huge contracts are a turnoff to potential customers. Recently, I had a client simply refuse to do business with a new company because the owner, having come from a large corporation, insisted on having my client sign a large and complicated contract with so many legal terms that neither my client nor I could clearly understand.

So, forget the large contracts as only a few small businesses have the capital to enforce them anyway. Most of the time, if a business performs work remotely; I would recommend that a business create a statement of work (SOW) for both parties to sign.

There are many templates you can download from the internet for free. A good SOW should include a scope of work, the schedule, the deliverable the customer will receive at the end of the project, how much it would cost and how the business will get paid, and some terms and conditions if things go off the rails.

When there is a change to the SOW, I also recommend that the business issue a simple change order to amend the SOW and get both parties to sign it. By making sure that all parties are on the same page (the SOW) fewer opportunities for miscommunications may arise in the future.

Billing

When it comes to billing it can be either fixed price or time and materials based.
If the business offers a fixed monthly service such as maintaining a client’s website for a monthly fee, it is advisable that the business collect a retainer from the customer at the beginning of each month.

If the business offers a fixed price to develop a single deliverable, I recommend that the business includes milestone payments in the SOW and bill each time a milestone is completed and accepted by the customer.

If the business is offering a time and material service there are many mobile apps and Windows/iOS timesheet tools that allow employees to track their time against a deliverable/milestone and generate an invoice or export a file that can be imported into QuickBooks or another accounting system. I also recommend that the business chooses a timesheet app that can be manually edited as many times as the employee can forget to start and stop the timer properly and would have to go back and edit the timesheet.

When a customer can evaluate the services being offered to verify that it meets their expectations, such as if the business is a plumbing contractor who fixed a leaky sink, a SOW is not necessary. However, rather than return to the office, produce an invoice, mail it to the customer, and wait for them to pay there is an easier way.

Payment

When the service is complete, I recommend that the service provider uses a smartphone or tablet with either a Square or PayPal card reader to accept immediate payment on site by swiping the customer’s credit card before they leave.

When you accept a credit card payment there are fees that amount to about 2.75% of the billed amount so be sure to factor that into your labor rate.

If a business works remotely for several months and requires that the customer receive a detailed time and materials invoice, I recommend a different solution to save the business the 2.75% credit card fee. I would recommend that the business encourages the customer to sign up for a free digital wallet application like Venmo. When the business sends the customer an invoice as an attachment in an email, I suggest that they also send them a payment-request in Venmo (or a similar app) and include instructions on how they can pay the invoice in the email body. Digital wallet tools like Venmo have no fees and are easy and safe to set up once each party enters their own private banking information.

In fact, as someone who often makes payments, I personally encourage my service providers to use Venmo so they can get paid quicker, with less hassle/effort, and with no fees. If they had not already set up an account, I usually encourage them to do so.

Getting paid as a service provider has never been easier with today’s digitally-enabled systems. Using outdated payment processes borrowed from corporate America is just plain nuts.

How do you get paid by your customer?

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