Payment Terms That Get You Paid: Deposits, Interest and the Right to Stop Work

Most cash flow problems I am shown are not revenue problems. The work was done, the invoice went out, and the money is sitting in someone else’s bank account earning them interest instead of you.

Forecasting tells you when that will hurt. I wrote about that side in cash flow forecasting for a small business. This is the other side: the terms you agree to before the work starts, which are the only real control you have over when the cash arrives.

The interest clause that is worth 5%

Start here, because it is the mistake I see most and it is completely avoidable.

Almost every invoice template in circulation says something like “interest at 1.5% per month on overdue amounts.” Section 4 of the Interest Act says that where a written contract makes interest payable at a rate for any period less than a year, no interest above 5% per annum is chargeable, payable or recoverable unless the contract contains an express statement of the equivalent yearly rate. Mortgages on real property are outside the rule.

So the clause that reads 1.5% per month and stops there can be worth 5% a year instead of the roughly 19.6% you thought you had. The fix is one line: state the monthly rate and the equivalent annual rate in the same sentence. Whether your specific wording clears the section is a legal question, and it is a cheap one to put to a lawyer once for a template you will use for a decade.

Deposits do more than fund the work

A deposit is usually described as working capital. That is the smallest part of what it does.

It qualifies the client. Somebody who will not pay 30% up front on a $12,000 engagement is telling you something about their own cash position, and you are better off learning it now. It also changes the psychology of the file: a client who is out of pocket wants the project finished.

And it caps your loss. On a fixed-fee project with a 40% deposit, the worst case is that you eat 60% of one job. With no deposit, the worst case is the whole thing plus the cost of chasing it.

Prepaid blocks are worth a note for anyone who bills time. The cash is yours before the work, which is excellent, but it is unearned revenue until you deliver, so do not read a healthy bank balance as profit. That distinction is worth getting right in your bookkeeping from day one.

The right to stop

The most powerful clause in a payment section is not the interest rate. It is the right to suspend work and withhold deliverables while an invoice is overdue.

Interest is a penalty applied after the fact to somebody who has already decided not to pay you. Suspension changes the decision itself, because the client now loses something by delaying. It is the difference between a consequence and a lever.

Two conditions make it usable. The right has to be in the agreement, and you have to be willing to exercise it. I have watched owners write a suspension right into every contract and never once use it, which is the same as not having it. Use it early, politely and consistently, or take it out.

Construction work has its own statute

If you supply services or materials to an improvement to land in Ontario, you are not negotiating payment timing from scratch. Ontario’s Construction Act imposes a prompt payment regime. An owner must pay the amount payable under a proper invoice no later than 28 days after receiving it, unless a notice of non-payment is given within 14 days. A contractor who receives payment must pay its subcontractors within 7 days.

The Act also creates lien rights and an adjudication process for payment disputes, both with deadlines that expire quickly. If you are in the trades and your agreement contradicts the statute, the statute is the one that matters, and that is a conversation to have with a construction lawyer rather than an accountant. The reporting side of paying subcontractors is covered in T5018 subcontractor reporting.

What late payment is actually costing you

Owners tend to price late payment emotionally. Price it properly instead.

If you are carrying a receivable for 60 days beyond terms and funding the gap on an operating line, the cost is the interest on that line plus the collection time plus whatever you could not take on because the working capital was committed. That is a real number and you can calculate it for your own book. It is usually larger than the discount you would have to offer for early payment, which is the argument for offering one.

The alternative is to finance the gap, and the comparison between an operating line and a term facility is in a business loan versus a line of credit. Financing a chronic collection problem is expensive. Fixing the terms is not. BDC keeps practical money and finance material for owners working through this.

The clock you do not control

Ontario’s Limitations Act, 2002 sets a basic two year limitation period running from when a claim is discovered. There is an ultimate period beyond that. Acknowledgments of a debt can affect the calculation, which is one of several reasons a written promise to pay is worth having.

The practical version: a receivable you have been patient about for eighteen months is closer to worthless than you think. Decide early. The escalation options and what each one costs are in when a client will not pay.

Across a border, none of this is available to you on the same terms. There is no Ontario limitation period to rely on, no small claims route worth the airfare, and the remedy has to be built into the payment method itself rather than pursued afterward. That is why a first export sale is priced around advance payment, documentary collection or a letter of credit rather than around net 30, as your first export sale sets out.

The order to fix them in

Do you take a deposit?
├─ No  → fix this first. Nothing else matters as much.
└─ Yes
   ├─ Can you suspend work on overdue amounts?
   │    ├─ No  → add it. Second highest return.
   │    └─ Yes → is the annual rate stated with the monthly?
   │              ├─ No  → one line, worth ~14 points of interest
   │              └─ Yes → move to invoicing discipline
   └─ Still slow? The problem is process, not terms.

Invoicing discipline is the unglamorous part and it beats every clause here. Invoice the day the work is done, not at month end. Send the statement before the due date rather than after. Call at seven days past due rather than at thirty, because the first call is a reminder and the fourth is a collection.

A reserve absorbs the damage while you fix the process, and an emergency fund for a business owner is where I would start if your receivables are already stretched.

If your aged receivables listing has more in the 90 day column than you are comfortable with, send it to me with your standard terms and we will work out which of these levers is worth the negotiation. Federal guidance for businesses is collected at doing business in Canada.