Understanding Payment Terms in Contracts: A Freelancer Guide

Why Payment Terms Matter

Payment terms are arguably the most critical part of any freelance contract. They determine when you get paid, how much you receive, and what happens if payment is delayed. Poor payment terms can turn a profitable project into a financial nightmare. Before signing any contract, make sure you understand the red flags in payment terms that could cost you money.

This guide will help you understand different payment structures, identify problematic terms, and negotiate better payment arrangements that protect your business.

Common Payment Term Structures

1. Net Terms (Net 15, Net 30, Net 60, Net 90)

Net terms specify how many days after invoice date (or project completion) payment is due:

• Net 15: Payment due 15 days after invoice (good for freelancers)
• Net 30: Payment due 30 days after invoice (industry standard)
• Net 60: Payment due 60 days after invoice (favoring the client)
• Net 90: Payment due 90 days after invoice (red flag - negotiate this)

2. Milestone Payments

Milestone payments break the project into stages, with payment due at each milestone:

• Upfront Payment: 25-50% at project start (protects you from non-payment)
• Midpoint Payment: 25-50% at project midpoint or key deliverable
• Final Payment: Remaining balance upon completion and approval

Why Milestones Work: They protect both parties. You get paid throughout the project, and clients can verify progress before releasing funds. This is often the best structure for larger projects.

3. Payment Upon Completion

All payment due when the project is complete. This structure has significant risks:

• You do all the work before receiving any payment
• Client could delay approval or request endless revisions
• No protection if client disappears or disputes the work
• Cash flow issues during the project

4. Retainer or Recurring Payments

For ongoing work, retainers provide predictable income:

• Monthly retainer paid in advance
• Clear scope of work included in retainer
• Overage billing for work beyond scope
• Provides financial stability and predictable cash flow

Payment Term Red Flags

1. Subjective Approval Criteria

Problem: "Payment due upon client approval" without clear approval criteria

Solution: Define specific, objective approval criteria. For example, "Payment due when deliverables meet the specifications outlined in Section 3" or "Payment due 5 business days after delivery unless specific issues are raised in writing."

2. Long Payment Terms (Net 60+)

Problem: Net 60, Net 90, or longer terms hurt your cash flow

Solution: Negotiate to Net 30 or better. If client insists on longer terms, consider adding a discount for early payment (e.g., "2% discount if paid within 15 days") or increasing your rate to compensate for delayed payment.

3. No Late Payment Penalties

Problem: Contract doesn't specify consequences for late payment

Solution: Always include late payment fees (typically 1.5% per month) and the right to pause work or terminate the contract if payment is significantly overdue.

4. Payment Tied to Client's Payment

Problem: "Payment due when client pays us" (common in agency contracts)

Solution: This is extremely risky. You have no control over when the end client pays. Negotiate for payment based on your deliverables, not the client's payment schedule. If they insist, add a maximum payment term (e.g., "Payment due within 60 days of delivery, regardless of end client payment").

Essential Payment Protection Clauses

1. Late Payment Fees

Always include late payment penalties:

• 1.5% per month (18% annually) is standard
• Or a flat fee (e.g., $50) for payments over 30 days late
• Specify when late fees begin (e.g., "after 5 days past due date")

2. Right to Pause Work

Include a clause allowing you to pause work if payment is overdue:

"If payment is more than 15 days overdue, Freelancer may pause all work until payment is received. Client remains responsible for all fees and deadlines will be extended accordingly."

3. Payment Method and Currency

Specify exactly how and in what currency you'll be paid:

• Payment method (bank transfer, PayPal, check, etc.)
• Currency (especially important for international clients)
• Who pays transaction fees (you or the client)
• Bank account details or payment platform information

4. Invoice Requirements

Define what information must be on invoices and when they should be sent:

• Invoice format and required information
• When invoices should be submitted (e.g., "within 5 days of milestone completion")
• Payment processing time after invoice receipt

Negotiating Better Payment Terms

1. Start with Milestone Payments

For projects over $1,000, always propose milestone payments. This protects your cash flow and gives clients confidence that work is progressing. A typical structure: 50% upfront, 25% at midpoint, 25% on completion.

2. Negotiate Net 30 or Better

Net 30 is the industry standard. If a client wants Net 60 or longer, explain the cash flow impact and negotiate for Net 30. If they won't budge, consider:

• Increasing your rate to compensate for delayed payment
• Offering a discount for Net 15 payment
• Requiring a larger upfront payment

3. Add Early Payment Incentives

Encourage faster payment with discounts:

• "2% discount if paid within 10 days"
• "5% discount if paid upfront"
• This can improve your cash flow while giving clients a reason to pay quickly

International Payment Considerations

For international clients, additional considerations apply:

• Currency: Specify currency and who bears exchange rate risk
• Payment Method: International wire transfers, PayPal, Wise, or other platforms
• Fees: Who pays international transfer fees
• Taxes: Understand tax implications in both countries
• Payment Timing: Account for international transfer delays (typically 3-5 business days)

What to Do When Payment is Late

If a client pays late:

1. Send a friendly reminder: "Just checking in on invoice #123, which was due on [date]"
2. Follow up after 5 days: More formal reminder referencing the late payment clause
3. Apply late fees: After the grace period, apply late fees as specified in the contract
4. Pause work: If payment is significantly overdue, exercise your right to pause work
5. Consider collection: For large amounts, consider small claims court or collection agency

Conclusion

Payment terms directly impact your business's financial health. Understanding different payment structures, identifying problematic terms, and negotiating better arrangements are essential skills for every freelancer.

Always analyze payment terms carefully before signing. Use tools like Accordo to quickly identify payment term issues, and don't be afraid to negotiate for terms that protect your cash flow and business.

For more resources on contract analysis and negotiation:

• Contract negotiation strategies - Master the art of negotiating better terms
• How to analyze freelance contracts - Complete guide to contract analysis
• 5 red flags in freelance contracts - Identify dangerous payment term red flags