The New Approach to Freelance Payment Without an Invoice
It’s time to make invoicing clients easier. | Photo by Manny Pantoja on Unsplash
When I was a freelance consultant, writing invoices was the task I avoided for as long as possible. No, it was sending invoices. Oh, wait, no – it was actually sending the stream of reminder emails necessary to ensure my invoices ever got paid.
I would consult the many ‘How to Get Paid as a Freelancer’ guides I found online, but they all proposed minor variations on the ‘invoice and pray’ approach. It was no surprise that 74% of freelancers have experienced problems with getting paid when this is the industry default. I became increasingly frustrated, until one point where my finances got just a little too stretched that I vowed to never offer clients this ‘free credit’ again and searched for a better way.
I had been using the escrow method to pay my subcontractors through Upwork for a year, and yet it never struck me that this approach could – and should – apply to all freelancers. However, the escrow method is complicated and requires a third-party to transact the payments, and I just couldn’t find a suitable party.
I got frustrated again. My choice was to stick with invoicing or pay 20 percent fees to put my projects through Upwork just to use their transaction system. Just because I wasn’t finding my clients through a platform shouldn’t mean that I couldn’t access this superior payment process!
The Escrow Method
Let’s rewind – what is the “escrow method”? Traditionally it is where a trusted third party holds property – typically the deeds to a house, or a used car – while the transaction is completed. This provides the seller with the security that they will get the money if they hand over the property, and the buyer with the security that they will get the property if they hand over the money. It means that neither party has to trust the other as they are both protected, making the transaction seamless and secure.
In the world of freelancing, this model is reversed. Rather than holding property, the third-party holds the payment while the freelancer works. Once the work is complete, the payment is released to the freelancer. This ensures their client gets the work they’ve requested, and that the freelancer gets the money they’re owed.
The system also facilitates mediation. If there is a dispute over whether the work has been completed to the standard set out in the contract, then the platform can arbitrate the disagreement and judge whether the money should be paid out to the freelancer, returned to the client, or an arrangement between the two.
This motivates the client to act in good faith throughout the engagement. Under the current setup, clients are incentivized to squeeze as much as possible from their freelancer because they know that small claims court is an ineffective dispute resolution solution.
The payment schedule for the entire project is agreed at the beginning of the project, and often projects are broken down into a series of milestones so that the payment amount is smaller but more frequent. Escrow services withdraw and pay out the funds automatically saving admin time for both parties.
The Benefits of the Escrow Method
The biggest source of this admin time saving…?
No more invoices!
Because the payment schedule is agreed at the beginning of the project, there is no need to prepare and send ‘backward-looking’ invoices each month.
For hourly projects, there may be a need to update the system with the actual number of hours worked, but this should take one tenth of the time it takes to prepare and send an invoice.
On completion of the project – or every month if desired – the platform will send a receipt to the client for their records. One freelance told me that she loves that she can “set it and forget it”. The escrow method removes that constant nagging sensation that you should be managing and administering your freelance work, when you want to just focus and do it.
So the escrow method? | Photo by Tyler Franta on Unsplash
Speed, Protection, and Everyone Gets Paid
These are actually secondary benefits of the method. The biggest reasons for using escrow are the protection it provides both parties and the greater speed at which the freelancer gets paid.
Freelancers guarantee their payment if they do the work – and can easily halt any work if the latest milestone payment has not been deposited to the escrow service. Clients are much happier to pay into a secure escrow service than to offer an unsecured 50% deposit. Even with a referral from a trusted source, neither party should be basing such a large transaction on trust alone.
The freelancer gets paid faster overall, receiving their money 24 days faster on average.
This is even accounting for the lack of upfront payment from a deposit. I’ve calculated that both parties in a transaction would save on average $700 in costs and time from using the escrow method over the typical approach on a $20,000 contract with standard terms.
The escrow method requires some adjustment in practices and a willingness to educate new clients who are unfamiliar with the method. Once you try it, you will never want to go back to being that frustrated freelancer tracking their invoices each week. I know, that was me.
Guest writer David is an ex-freelance consultant and now the CEO + Co-founder of LifeWork. They have just launched their escrow-based payment platform that is getting freelancers paid faster, more securely, and without an invoice or 1099 in sight.