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This 37 message thread spans 2 pages: 37 ( [1] 2 > >     
Extending Credit
Fortune Hunter

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 3958365 posted 7:53 pm on Jul 23, 2009 (gmt 0)

I am discovering with this recession that many small businesses still want to do web site projects, but many of them are predictably "low on cash" hence the problem. I want to bring in new accounts and in many of these cases I know these people. I am considering extending credit or setting up payment plans for clients.

My thinking is I can continue to follow my existing policies where I ask for 50% down and the remainder on completion or partial payments until complete depending on how quick the project is going. Unfortunately most small businesses don't seem to have that type of cash laying around any more.

My thought is if I broke payments into 12 months or 4 payments or some other type of bite sized arrangement I could bring in new work and set up some predictable monthly income streams for a period of time and help these people out at the same time. Not as great as large pay day projects, but probably more realistic in this economy.

Obviously the issues of extending credit is missed payments or worse no payments and outright defaults. Sure I can probably remove the web site when that happens, but unfortunately I am still out the time.

Any advice about how or policies used from others would be much appreciated.

 

lammert

WebmasterWorld Senior Member lammert us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 6:46 am on Jul 27, 2009 (gmt 0)

In general I would say that you are not a replacement for the bank. If a company (small or large) doesn't have sufficient financial backup to finance a web development project and banks are also not willing to provide the extra money, I would stay away from them.

...and in many of these cases I know these people.

Even more reason not to get involved. It is quite easy to lose friends in such cases.

vincevincevince

WebmasterWorld Senior Member vincevincevince us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 3958365 posted 7:15 am on Jul 27, 2009 (gmt 0)

You are on reasonable sound ground so long as the amount of money you have received is in proportion to the amount of work you have done at any given time. So, if you downpayment is reduced to 10%, that is sound so long as the next payment is due by the time you have done 10% of the work. If a payment is delayed, stop work and work on something else until it arrives. If the money never arrives, you have done 10% of the work for 10% of the pay; which seems fair to me.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 5:19 pm on Jul 27, 2009 (gmt 0)

The main issue (besides the loss of money money) when you extend credit and don't get paid is the amount of time and effort you have to waste chasing down deadbeats, er- clients. That's unproductive time that could have been spent doing billable work. So you're not only out the original payment, but you're also out the money that you could have been earning on other projects.

spadilla

5+ Year Member



 
Msg#: 3958365 posted 3:19 am on Jul 28, 2009 (gmt 0)

I do this frequently with non-profits and people I have met face to face and consulted with. I've learned not to do this on a long distance agreement -- no face to face contact = more chance to blow you off and forget about you. I also only do this agreement with a credit card on file.
I host the sites too, so if payment isn't made I tell them I will have to take the site offline. Thankfully, I've only needed to "threaten" one client with that though.

Fortune Hunter

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 3958365 posted 12:16 am on Jul 29, 2009 (gmt 0)

You are on reasonable sound ground so long as the amount of money you have received is in proportion to the amount of work you have done at any given time.

In the situations I am referring to this really won't work. The deal is I do the web site so they can start benefiting from it right away, but I am taking the payments over some period of time. I understand what you are saying and that is how I normally do things, but this is a situation where they are getting the site, but don't have to come up with the cash right now.

but you're also out the money that you could have been earning on other projects.

A student of economics I see. The famous "opportunity cost" equation. In principle I agree with this, but I always thought that it was really only true as long as you were super efficient and could bill almost a 100% of your time all the time. Personally I am never that efficient. While it is true my time is gone and it probably could have been spent on something more productive I doubt I can make the claim all the time that this could have been billable time. Sometimes yes, sometimes no.

tim222

WebmasterWorld Senior Member 5+ Year Member



 
Msg#: 3958365 posted 4:21 am on Jul 29, 2009 (gmt 0)

If you're not aggressive about collections then you're going to have a sizable default rate. One solution is to raise your prices 20% across the board to make up for people who don't pay... and offer a 10% discount for those who pay in advance.

That's still a fair solution for those who can't pay up front. If they have to borrow the money they're looking at least 20%+ (if they can get the loan) but more likely around 40% if they go a credit card factoring solution.

Under this arrangement those who can pay up front will have to apay a little more but if they complain or if it makes a difference in getting the job you could always discount it even more.

If you can afford to float the cash and you're willing to make some phone friendly calls once in awhile (asking about missed payments), then it would probably work to your advantage in the long run.

vincevincevince

WebmasterWorld Senior Member vincevincevince us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 3958365 posted 8:59 am on Jul 29, 2009 (gmt 0)

If you can, find a way to accept credit cards; then let the client put it on his personal card. That way you gain three things:
- You get the money now
- Someone else gets the credit risk (card company)
- The client is able to make repayments at a schedule that suits him and his card company

tangor

WebmasterWorld Senior Member tangor us a WebmasterWorld Top Contributor of All Time 5+ Year Member Top Contributors Of The Month



 
Msg#: 3958365 posted 9:07 am on Jul 29, 2009 (gmt 0)

...don't have to come up with the cash right now...

Then you are making a gift.

Don't lose track of how business operates. You do a job, you get paid. That's the long and short. Otherwise you are making an investment in THEIR future ability to pay you. And as a web creator you probably already know their chances in that regard!

Go for a percentage of profits to pay you off... and have an exclusive and full right to see the books, or say "Come back when you have the scatch."

trillianjedi

WebmasterWorld Senior Member trillianjedi us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 3958365 posted 11:26 am on Jul 29, 2009 (gmt 0)

My thinking is I can continue to follow my existing policies where I ask for 50% down and the remainder on completion or partial payments until complete depending on how quick the project is going.

On longer projects I tend to split 33/33/33 which is working for most clients in the current market and is generally easier than 50/50 for them.

As mentioned above, it's not your job to play banker. If a business has a decent cash position and the only problem is cash flow, they should speak to their bank. And if their business is any good their bank will provide them what they need to cover their cashflow position.

Otherwise the net result is their cashflow problem just becomes your cashflow problem.

The other approach is to play banker, extend the payment cycle and charge an uplift accordingly equal to bank overdraft rates. You could then use the additional cash to fund the factoring of your invoices so that you at least still get the cash up front.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 3:34 pm on Jul 29, 2009 (gmt 0)

A student of economics I see.

More like a student of the been-there-done-that school.
The famous "opportunity cost" equation. In principle I agree with this, but I always thought that it was really only true as long as you were super efficient and could bill almost a 100% of your time all the time.

Another way to look at it: assume that you do 8 hours/day of "billable" work. After that, you've got another hour of "unpaid" work to do chasing down deadbeats just to get the money that you already billed. That's an hour less of relaxing after your hectic day. That's an hour of "your" time that you have to waste that will, at best, get you back to the status quo (of being paid what you should have been paid in the first place).

The other issue is this doesn't take into account the intangibles of the situation: added stress from having uncollected receivables and having to deal with deadbeats, which can affect your productivity as well as your ability to relax when you're "off the clock."

The stress builds up even more, as trillianjedi pointed out, when their cash flow problems because your cash flow problems.

One more issue- look around at all the businesses declaring bankruptcy and/or closing. (Many of them have gone under because of cash flow problems resulting from unpaid receivables.) Most of their clients (like web designers) that they owe money to are not going to see any money from it. Or even if they do, it will most likely be a small percentage of what they are actually owed.

Extending credit costs money- how many credit cards charge 0% interest on unpaid balances and late payments? If you feel like you can handle the potential time/energy waste, I'd use tim222's suggestion.

aspdaddy

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 3958365 posted 6:32 pm on Jul 29, 2009 (gmt 0)

Its very, very effective. It also helps push VAT into the future which can in itself justify paying interest. If you can tie in hardware it has loads of additional benefits such as delaying ownership of assets.

I was at a big reseller event recently where they were showing how to close deals in a recession using finance.

Heres the real secret , partner with a single finance company, get paid 100% within 2 hours of closing the deal, and let them take all the risk!

HugeNerd

5+ Year Member



 
Msg#: 3958365 posted 10:30 pm on Jul 29, 2009 (gmt 0)

The main issue (besides the loss of money money) when you extend credit and don't get paid is the amount of time and effort you have to waste chasing down deadbeats, er- clients.

YES! EXACTLY!

Plan to lose 5-10% of billable hours in getting the ACTUAL payment. Word your credit documents VERY carefully. I work for a wholesaler in the construction industry -- we take "client's" property all the time through our lien rights when they default on the property. Not sure if intellectual property has lien rights, but I'd find a way to secure the website and all design work as yours should they not pay -- don't risk them getting the site despite lack of payment!

Just remember, bill collection can make or break you once you start extending credit; all of our employees have this hammered into them on a daily basis...everyone who talks to a client is responsible for payment. It's the easiest place to cut costs -- effective bill collection can save you money while inefficient bill collection creates unnecessary cost. Include a financing charge as well as late payment and interest fees (you ARE going to charge interest, right?) -- you get a bigger number to write off if you get screwed and more money if they pay. Give clients who pay on time, and especially early, incentives to do so (i.e. 1% Net 30th, 2% Net 15th) so that there is a carrot and a stick. Better yet, hire a collection agent and stick to what you do best (I assume this is designing websites and not loan originating and bills collection). Then someone NOT IN SALES can be nasty about payment; it can be awkward trying to upsell a customer after telling them they are past their credit limit.

vincevincevince

WebmasterWorld Senior Member vincevincevince us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 3958365 posted 5:29 am on Jul 30, 2009 (gmt 0)

It also helps push VAT into the future which can in itself justify paying interest.

Sure about that? I believe that the VAT time of supply is when you have completed your part of the work (e.g. finished the site) not when the site is finally paid for. As I understand it, you need to pay the VAT on the whole sum at the beginning even if payments are spread out. (Unless you are on the cash accounting scheme of course.)

incrediBILL

WebmasterWorld Administrator incredibill us a WebmasterWorld Top Contributor of All Time 5+ Year Member Top Contributors Of The Month Best Post Of The Month



 
Msg#: 3958365 posted 12:14 pm on Jul 30, 2009 (gmt 0)

Learn from the current credit crisis that caused the current economic meltdown.

It was the issuing of credit to people that couldn't afford to pay that eventually defaulted all at once that caused the economy to come crumbling down.

Here again, the OP is, much like the mortgage industry did, attempting to seek out clients that are unable to pay just to book the business.

IMO, extending credit to get work it like working pro bono except with hard feelings and personal financial hardship when you don't get paid in full, or at all, which is the only outcome I can see from soliciting businesses that don't have any cash laying around.

You can either:

a) offer intro packages with reduced rates and scaled back scope of work to make it more affordable for those on the fence

b) offer big discounts like 15% off for prompt payments and likewise, nasty penalties for late payment

c) seek a different class of clients that have more cash

d) take a position in a design company with bigger cash positive clients that are better insulated from the economic issues

However, under no circumstances would I extend credit or get into bill collecting situation as a business model unless food clothing and shelter aren't a serious ongoing concern.

Sure I can probably remove the web site when that happens, but unfortunately I am still out the time.

I never delivered a working site on their server until payment was complete.

They could look at it on my server to see it was complete and when the money changed hands it was dropped on their server.

The 50% down covered my base time and kept the lights on, mortgage paid and everyone was fed.

If they refused to pay the final installation, they never got the website in the first place so I never had a problem with trying to shut it down. Wrote off a couple of sites like that over the years when the clients cash dried up before the project ended and it didn't really bother me because the client got nothing in the end and I was basically paid upfront to build the site.

However, had I given them credit and payment plans they would've still been broke and out of business and I would've been out all my time and missed other projects that would've paid.

Just say no to credit, it's evil.

trinorthlighting

WebmasterWorld Senior Member 5+ Year Member



 
Msg#: 3958365 posted 3:02 pm on Jul 30, 2009 (gmt 0)

Partner up with a bank and extend loans, if a bank would not approve a loan for a small business, should you take the chance by extending them credit? If a bank will not approve a small business, that means the risk factor is way to high.

In this economy, cash is king and the ones with the cash will survive and do real well in the future. You will be a lot better off spending your time finding the clients with the cash on hand.

I think many of us would agree that we have seen a lot of smaller .com's disappear lately because they can not sell items and pay their bills.

incrediBILL

WebmasterWorld Administrator incredibill us a WebmasterWorld Top Contributor of All Time 5+ Year Member Top Contributors Of The Month Best Post Of The Month



 
Msg#: 3958365 posted 5:08 pm on Jul 30, 2009 (gmt 0)

I think many of us would agree that we have seen a lot of smaller .com's disappear lately

I run a niche directory with about 40K vendors and almost 500 are going offline each month.

Some come back online as they were just down temporarily for unpaid hosting or domain names, or worse yet - belly up hosters - but about 350 are permanently gone each month.

That's some of the worst attrition I've ever seen since I started in '96.

Just another reason of why I wouldn't extend personal credit to any of them! ;)

MrHard



 
Msg#: 3958365 posted 6:30 pm on Jul 30, 2009 (gmt 0)

There is also the problem of charging interest.

If you don't charge interest you may find that most people procrastinate. If they had the money they would just pay outright. If you do charge interest, it causes resentment and people may try to leverage the business they have with you to not pay it, with excuses or hints they may go elsewhere.

Credit is not as easy as it sounds, personally I would not get involved in this anthill.

skibum

WebmasterWorld Administrator skibum us a WebmasterWorld Top Contributor of All Time 10+ Year Member



 
Msg#: 3958365 posted 9:48 pm on Jul 30, 2009 (gmt 0)

Can you agree on any kind of a performance arrangement so your goals are aligned with theirs and you make money when they make money from teh web initiatives?

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 10:45 pm on Jul 30, 2009 (gmt 0)

Can you agree on any kind of a performance arrangement so your goals are aligned with theirs and you make money when they make money from teh web initiatives?

I don't think most web designers want to be involved with their clients' businesses. Their focus should be designing/building the web site according to the client's specifications. How the client uses the web site and runs their business after the product has been delivered is the client's business. Otherwise, you run into another set of issues, as discussed in the OP's other thread [webmasterworld.com].

incrediBILL

WebmasterWorld Administrator incredibill us a WebmasterWorld Top Contributor of All Time 5+ Year Member Top Contributors Of The Month Best Post Of The Month



 
Msg#: 3958365 posted 12:55 am on Jul 31, 2009 (gmt 0)

Can you agree on any kind of a performance arrangement so your goals are aligned with theirs and you make money when they make money from teh web initiatives?

I used to know a designer that did this for some really big sites.

It was all golden until he got really greedy pushing the SEO envelope and screwed up big time getting their whole network of sites banned in Google.

Would you want to be on the legal end of that fiasco?

I sure wouldn't.

jastra

5+ Year Member



 
Msg#: 3958365 posted 8:10 pm on Jul 31, 2009 (gmt 0)

It can make you twice as bitter to learn that you can't even deduct those bad debts for services rendered, such as Web work and programming, from your taxes. You can for products, but not services. At least here in the U.S. you can't.

The taxman's rationale is that if he allowed it, people would just make stuff up.

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 8:39 pm on Jul 31, 2009 (gmt 0)

jastra,
Not true- you CAN write off bad debt. See part 10 of Pub 535 [irs.gov].

...services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt.

You'll need to show that you made good faith attempts to collect the money- a handful of e-mails and a copy of the original contract should suffice.

jastra

5+ Year Member



 
Msg#: 3958365 posted 1:46 pm on Aug 1, 2009 (gmt 0)

LifeInAsia, you're right. It's right there in the IRS instructions. I tried to find the tax expert's page online where I read that but couldn't. Thanks. I'll take advantage of the rule.

Whitey

WebmasterWorld Senior Member whitey us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 10:48 am on Aug 2, 2009 (gmt 0)

If you want to extend credit, know your customer well and be satisfied that you will get paid when you require it.

If you don't , as was stated above , let the professional risk takers shoulder the burden ie credit card co's , banks etc.

ruskin012



 
Msg#: 3958365 posted 1:23 pm on Aug 5, 2009 (gmt 0)

For extending credit you need some legal help and client satisfaction. But extending credit to long time is risky.

tim222

WebmasterWorld Senior Member 5+ Year Member



 
Msg#: 3958365 posted 3:09 pm on Aug 8, 2009 (gmt 0)

HugeNerd wrote:
...all of our employees have this hammered into them on a daily basis...everyone who talks to a client is responsible for payment. It's the easiest place to cut costs.

This is intriguing. Can you give some examples on how your employees contribute to the collection efforts?

One way I can think of might be, any tme a client calls for customer service, the customer service agent reminds them of their balance by saying something like, "Good afternoon Mr. Smith. I have your account on my screen now. Your balance is $12,345.67. We received your last payment of $234.56 on August 6. How can I help you?"

What else can employees do to help reduce collection costs?

LifeinAsia

WebmasterWorld Administrator lifeinasia us a WebmasterWorld Top Contributor of All Time 5+ Year Member



 
Msg#: 3958365 posted 7:30 pm on Aug 8, 2009 (gmt 0)

"Good afternoon Mr. Smith. I have your account on my screen now. Your balance is $12,345.67. We received your last payment of $234.56 on August 6. How can I help you?"

Or, "Good afternoon Mr. Smith. I have your account on my screen now. Your balance is $12,345.67. We have not received your last scheduled payment of $234.56 on August 6. I see that Guido is scheduled to visit you this afternoon for a 'payment remnider.' How can I help you?" :)

D_Blackwell

WebmasterWorld Senior Member 10+ Year Member



 
Msg#: 3958365 posted 4:21 am on Aug 10, 2009 (gmt 0)

In the situations I am referring to this really won't work. The deal is I do the web site so they can start benefiting from it right away

When do you benefit - especially if they don't? They won't be paying you much for services until they are actually making some money - which may not happen. Also, what do you know about how overextended they are with other 'pay you later' deals?

How much are you hurting to consider going out so far on such a thin limb?

You are talking about doing all the work, taking all the risk, and maybe getting paid some of your money at a future date, and maybe getting a little more later.....

ruskin012



 
Msg#: 3958365 posted 5:42 am on Aug 10, 2009 (gmt 0)

Its really tedious job to make decision regarding the extending credit. But I think we have make our policies flexible in accordance with the customer. The older business relationship must be considered for payments.

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