How to avoid deadbeat clients

I responded to a post on the Econsultancy forums the other day which dealt with an issue most of us have had the misfortune of dealing with at some time or another: deadbeat clients who haven't paid their bills.

In tough economic times, businesses and contractors providing services to others need to be extra vigilant about deadbeat clients because there are simply more of them out there.

Sometimes these clients aren't deadbeats because they want to be. Take for instance the theoretical long-term client who suddenly can't pay what he owes you because he himself is owed money that he was relying on to pay the bills.

Unfortunately, once you find yourself dealing with a deadbeat client, the outcome usually isn't good. In many cases, recovering anything at all is impossible and for most of us, the amounts owed don't justify costly and time-consuming legal action and collections.

So what's the best way to deal with deadbeat clients? Avoid them.

Here's how:

Always sign an agreement. Not having an agreement makes your life 1,000 times more difficult when it comes to dealing with a deadbeat. The mere lack of an agreement often gives the worst deadbeats the feeling that they're safe because even if they're in the wrong, most know that the time and money required to establish the facts surrounding what was agreed upon make legal action an unattractive proposition.

Get milestone payments. Never put yourself in a position where you've done all the work and are due one big payment from the client. You assume too much risk when you do this. Instead, agree upon key projects milestones and base the milestone payments on how close each of those milestones brings you and your client to completion.

Don't forget the most important milestone: the deposit. A deposit of 10-25%, due upon execution of the agreement, is usually reasonable depending on the type of project and total project value. A deposit is valuable for two reasons. First, if a client can't make a deposit payment in a timely manner, chances are he won't make future payments in a timely manner. And second, as an added bonus, once a client has given you some money up-front, he's more likely to be eager to keep the project moving at an appropriate speed.

Don't deliver or deploy until you're paid. Once a client has the opportunity to sign off on the final work product, you should require that the remaining balance due be paid in full before the work product is delivered or deployed. This prevents you from finding yourself in a situation where the client has everything and you have nothing.

Don't assign intellectual property rights until you're paid in full. This is perhaps the most important weapon against deadbeats that you can include in your agreements. Assuming that you're producing a work product under a 'work-for-hire' arrangement, your agreement should clearly state that all right and title to the intellectual property you produce is only assigned to the client after the client has paid you the full amount specified in your agreement.

When this is contained in your agreement, if you find yourself dealing with a deadbeat who uses any of the work product he hasn't fully paid for, he will be violating your intellectual property rights. This provides significant legal leverage. Not only does it offer additional legal recourse, it makes it possible to pursue takedowns of your work product where appropriate. For instance, if you design a website for a deadbeat client, it may be possible to pursue the takedown of that website with the website's host since the deadbeat client's use of the website will be in violation of your copyright.

As they say, "an ounce of prevention is worth a pound of cure" and that's especially true when it comes to dealing with deadbeat clients. Avoiding them is 90% of the battle and by following these simple tips, you will probably be able to eliminate the deadbeat client hassles that so many have pulled their hair out over.