A video shop may be completely booked and doing an excellent job at producing video content yet fail to make ends meet financially. This is not necessarily a paradox; it occurs when a video production company has a billing structure that does not reflect the reality of how clients pay for their video production: a video production project begins many weeks prior to the issuance of an invoice, payment processing for clients can take anywhere from thirty to sixty days, and video editors are required to receive compensation every fourteen (14) days based upon the cycle of a client’s accounts payable process.
Billing is not simply an administrative task added-on to a video production company’s “creative” aspect. Rather, billing is the mechanism that determines if growth within a video production company will be sustainable or if each successive client will only further exacerbate the financial burden associated with cash flow. The subject matter seems to generate interest most frequently among video production companies that have previously experienced being left high-and-dry by a client regarding an unpaid invoice; however, this is typically the worst possible time for these same companies to formulate a comprehensive billing strategy.
The Three Billing Models: Making Invoicing a Core Part of Studio Operations
Most video shops use one of three methods to charge clients; regardless of the quality of the work or the reliability of the client, these models will always generate the same type of cash flow pattern.
|
Billing Shape |
How It Works |
Cash Flow Pattern |
Risk Profile |
|
Per-project |
Deposit upfront, balance on delivery or milestones |
Lumpy, tied to project timing |
Exposed to scope creep and late final payment |
|
Monthly retainer |
Fixed fee billed monthly, in advance or arrears |
Smooth, predictable, recurring |
Exposed to one client’s non-payment hitting a full month |
|
Prepaid block |
Client pays upfront for a bundle of hours or deliverables |
Cash in hand before work starts |
Lowest cash-flow risk, but requires strong client trust at the outset |
Billing per project is the most popular way that new shops start, primarily because it is easy to describe to clients who do not know how a video shop determines its costs. Billing per project has a significant disadvantage regarding timing: money flows into the agency irregularly based on project completion and a late-paying client could create a big hole between the time that editors need to be paid and when the agency has the funds to pay them.
Billing on a monthly retainer solves the timing issue by creating predictable, measurable monthly income from previously unpredictable project income. This is why almost all shops convert to retainer-based billing as soon as they have enough repeat clients to support a retainer. The tradeoff with retainer-based billing is concentrated risk: if a client being billed on a retainer stops making payments, that is the entire month’s expected revenue lost, not just one project among several projects.
Prepaid blocks, which involve a client paying up front for a package of hours, revisions or deliveries prior to starting work, provide the best cash flow protection of the three models, as long as the client does not want to see finished work before paying. Typically, this involves either an established relationship or a completely new client with so much confidence in your reputation that they are willing to be the first. Fixed monthly subscriptions for a predetermined amount of editorial time, such as Vidpros’ own pricing model, fall within the same prepaid category as blocks and demonstrate why this model provides value for both parties: the client knows exactly what level of editorial capacity they are purchasing with each month’s payment and the agency never incurs any production expenses without having received a cash payment to cover that expense.
Some shops do not operate under only one billing model. For example, many shops use per-project billing for new clients or clients whose only purchase was a one-time project and then transition to a retainer or prepaid block once the client demonstrates consistent timely payments and sends ongoing business. Tending to view billing shapes as evolving with the client relationship versus viewing them as a permanent decision made during the initial contract negotiations appears to result in improved cash flow results compared to remaining committed to whatever model seemed easiest to sell initially.
Securing Deposits Upfront: Protecting Your Own Work and Cash Reserves
A deposit is intended to act as both a financial buffer and an indicator of a client’s intention to complete the project. If a client pays a legitimate deposit, that indicates that the client intends to follow through on completing the project. Conversely, if a client cannot or will not commit to paying even a small deposit, that indicates that the client may not intend to continue with the project. Deposit percentages vary significantly depending upon the size of the agency and the complexity of the project. Freelancers and solo operators typically require deposits equal to 50% of total fees because they are solely responsible for covering all of their production risks. Small shops (2-10 people) often ask for deposits ranging from 30%-50%. Mid-size shops (10-30 people), while still collecting deposits, tend to ask for smaller deposits (typically 25%-30%) because they have more diverse sources of revenue and can afford more risk on a per-project basis, and they usually take retainers paid in advance. Large production companies (30+ people) often avoid a single deposit altogether and instead bill against project milestones, with media spend paid upfront (Alto Accounting “Late-Paying Clients: The Agency Owner’s Guide”). Regardless of whether or not an agency settles on a specific deposit percentage, what is important is that the agency remains consistent in applying that same deposit percentage across all clients. This includes refusing to negotiate lower deposits for clients who complain about paying higher deposits. Those clients are often also the same clients that are most likely to delay payment on outstanding invoices.
What Is Really Standard for Net Terms?
While “net 30” is often referred to as the default in client contracts, net terms tend to be used differently by shop size rather than assumed by the client. Freelance editors and sole proprietors typically operate on 14-day terms or payment due on delivery because they have the least amount of capability to bear a client’s unpaid account balance. Small shops generally operate on 14-30 day terms. Medium and large shops generally standardize on 30 days for two reasons: their clients, often larger organizations with their own accounts payable processes, tend to expect 30 days as the norm, and holding the line at 30 means resisting the 60-day-plus terms large buyers push for — price those in or negotiate them down (Alto Accounting “Late-Paying Clients: The Agency Owner’s Guide”).
Many shops fail to recognize that extending net terms (i.e., allowing a client additional time to pay after receiving an invoice) represents providing some degree of credit to the client. As such, credit terms should increase as the trust increases between the client and agency, not be provided equally to all clients regardless of payment history. New clients earn longer net terms over time, not immediately upon receipt of an invoice.
The 7/14/30/60-Day Escalation Ladder
Following non-payment of an invoice beyond the due date, the responses should be structured and predictable, not made up of impromptu conversations with the client, dependent upon how uncomfortable the conversation felt. A possible escalation structure would look something such as the below:
- Day 7 past due: send a polite, concise e-mail requesting a review of the invoice. At this point, assume it was simply overlooked by someone involved with the project.
- Day 14 past due: make a phone call. Not an additional e-mail. A conversation is much less likely to be ignored than an e-mail and can provide insight into why there may be a problem with paying the invoice: did they overlook the deadline, do they have financial difficulties or are there issues related to the work that was completed?
- Day 30 past due: write a formal request for payment referencing the payment terms in the contract clearly and include a restatement of the amount due along with the original due date.
- Day 60 past due: if no progress has been made to resolve the issue at this point, either formally pursue a collection through legal avenues or consider using a collections agency. Typically, it becomes unlikely to recover funds at this point (Alto Accounting, “Late-Paying Clients: The Agency Owner’s Guide”).
By the time an invoice reaches 90 days past due, the payment is no longer considered “past due”, but likely “uncollectible without some form of formal collection”. In many jurisdictions, small claims court is a viable option for recovering monies owed (typically limited to amounts within a certain jurisdictional limit) and there are filing fees associated with pursuing a claim — in England and Wales these run £35 to £455 depending on the amount claimed, and a solicitor’s letter before action typically costs £100 to £300. US filing fees and attorney letter costs vary by state, so check your local court’s fee schedule. Many times these letters alone are enough to cause the client to make payment prior to actually having to file.
When to Stop Work for a Late-Paying Client
Video shops tend to delay stopping work on projects for late-paying clients too long because of a combination of both hope and personal discomfort. There is one straightforward way to protect a shop from financial harm and that is to stop working for a client when their account moves from being late to being officially delinquent. That point is generally somewhere between 30 and 60 days, regardless of whether a shop finally loses patience.
There is a reason to establish a definitive cut-off point for when to stop working for a client ahead of time, and in writing. Once established beforehand, it eliminates the tendency in-the-moment to continue working on a project. When editing and/or managing a project, an individual has an emotional investment in seeing it through to completion, even if the client does not intend to pay. Additionally, when managing relationships with clients, individuals want to avoid potentially harming them by delaying a stoppage beyond what is fiscally responsible. Establishing an early predetermined threshold for terminating services removes the emotional bias from making a decision.
Notifying clients that services will be stopped for them does not require being aggressive. A short and factual notification (referencing the specific overdue invoice(s) and contractual language that applies) explaining that services will resume when all accounts are paid in full is normally sufficient. Most clients who are operating in good faith will address the situation promptly once they understand that stopping service will now create a tangible cost to them of delaying payment, rather than an intangible cost.
Late payment charges and interest: what should I charge?
In the UK, statutory interest on a late commercial debt runs at 8% per year above the Bank of England base rate. The US has no equivalent statutory rate, so the charge has to come from your contract, and the common figure there is 1.5 percent monthly interest on any outstanding balances owed to a freelancer after an invoice goes past due. These charges apply automatically when an invoice goes past due, as opposed to being offered, and then waived (Freelancers Union, “how to charge late fees”). While the charge is relatively low, its primary purpose is not to generate significant excess income; it serves as a legitimate financial motivator for clients to pay timely, as opposed to treating the freelancer’s invoice as just another lower priority bill among several vendors’ bills.
To accomplish this effectively, however, late charges cannot be added retroactively after a payment has become overdue. They must be included in the original contract or agreement of work. When charges appear to be created after the fact as a result of frustration over delayed payments they read like penalties; when they are included in the original contract, they read like previously agreed terms; and as such, clients react quite differently to each.
Sample Payment Terms Provision
A good payment terms provision is probably the best way to avoid late payments. Automated reminders can improve payment follow-up efficiency. There is some chance that your business can benefit from goodwill toward you after the fact, but that’s not going to do anything for you when the client doesn’t pay. A good place to start would be to find something like this, that is appropriate for your business and its deposit and payment schedule:
“A deposit equal to X percent of the total project price must be made prior to beginning work. The balance is payable [14 or 30] days following delivery of final product. Any invoices which remain unpaid during this period shall bear interest at a rate of 1.5 percent per month on the amount owed. In the event payment remains delinquent beyond 30 days, [Your Business Name] reserves the right to suspend all activity on the account until the account is brought current. Should payment remain delinquent for greater than 60 days, [Your Business Name] may pursue collection of said debt by whatever means available (including, but not limited to, filing suit in small claims court, or utilizing a third party collections service) and/or terminate our agreement.”
The reason why this provision works so well is that it eliminates the uncertainty surrounding a discussion that neither side wants to have. The terms of the bill were agreed upon before there ever was a late bill. Therefore, since the terms of the bill were agreed upon, enforcing those terms becomes about sticking to an agreement both parties have entered into, not negotiating.
Establishing Billing Disciplines Within the Relationship from Day One
The ultimate expression of this concept is not reactive, it is based upon structure. Establishing billing terms that are clearly articulated, consistent and articulated prior to the first time a client has an opportunity to be late with an invoice establishes expectations regarding how the relationship will operate, just as establishing a document labeled “Brand File” for your client sets the expectation for how you will ensure brand consistency throughout every piece of content delivered to the client. Each represents the same type of discipline: establish the rules once and apply them consistently and the relationship operates under the agreed-upon rules instead of relying on goodwill each and every time there is an issue that requires resolution.
There are few video editing partnerships working on behalf of agencies selling capacity back to their clients that don’t experience smooth operation as a result of a written, consistently applied billing policy. The exact same discipline used by those businesses operating at the lower end of the supply chain protects relationships among partners higher in the supply chain by eliminating any need to determine, in the middle of a project, what actions will follow if a payment is delayed. Billing shape is also a separate question from what you charge in the first place.
Our guide to the four agency pricing models sets the fee structure; come back to these billing mechanics once those numbers are fixed.
Frequently Asked Questions
How large of a deposit is typical for a video production project?
The deposit amount depends largely on agency size: Freelance producers normally require 50% deposits; Small shops (2-10 people) normally collect between 30-50%; mid-size shops (10-30 people) normally collect 25-30%. Large companies tend to shift to milestone-based billing as opposed to collecting a single deposit. While it’s difficult to define a proper number for deposits, it’s far more important to apply that number consistently to every client.
Would I want my video agency to use net 30 terms for all clients?
Not always. Net terms represent a form of credit and new clients with little to no payment history should not automatically qualify for net terms along with reliable paying clients. Use shorter terms, or larger deposits, as default values until you establish trust with your client base.
At what point should I stop doing work for a client who is not paying me?
Sometime between 30-60 days past due, determined by your contract language prior to having to decide the matter emotionally in real-time. Stopping work later than that and waiting for a relationship to resolve itself is likely the most frequent billing mistake video shops make.
Is it acceptable to charge interest on overdue invoices?
Yes, and 1.5% per month charged on outstanding balances is a fair and defensible rate. Interest rates should be stated in your initial contract in order to have standing; charging interest on late invoices only after they are already late typically carries a perception of punishment versus an agreed-to term.
In terms of cash flow, what’s the difference between a retainer and a prepaid block?
A retainer charges a predetermined fee each month for ongoing services, providing predictable, monthly income, but places risk concentration in any single client that ceases paying. A prepaid block provides payment for bundles of services prior to commencement, representing the greatest degree of control over cash flow, but relies on high levels of client trust, generally achieved with long-established relationships.
Are small claims courts worthwhile pursuing for an uncollected invoice?
For amounts within limits set by small claims court, generally yes. Costs associated with filing are usually modest: in England and Wales they run £35 to £455 depending on the amount claimed, with a solicitor’s letter before action costing £100 to £300. US fees vary by state, so check your local schedule. Either way, a formal demand letter is often enough to obtain payment without requiring a court appearance.
