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A no-nonsense payment guide for freelancers

Running an independent freelance business isn't just about producing great work; it requires establishing payment processes and systems that allow you to professionally serve your customers while managing your financial success.

Here's a guide to formalizing your payments with your freelance clients, and why it's so important.

Simplify your business accounting

When you own a business you're required to pay estimated quarterly taxes on the income you make (in addition to annual tax filing), but you can also deduct many business-related costs for things like studio space, supplies and equipment, and some business-related mileage, meals and travel expenses.

That said, keeping track of such costs manually can prove cumbersome. With a formalized payment system you can easily and automatically track what you sell and to whom, when you receive payment, and the costs you incur for each project.

Limit your liability

In just a few minutes, you can apply for and secure a Federal employer identification number (EIN), and with it, open a business checking account. Though the Small Business Administration (SBA) estimates that more than 65 percent of all small businesses use credit cards on a regular basis, fewer than 50 percent of them are in the businesses' name.

Not only does using a personal credit card for business expenses mean missing the opportunity to build business credit history (which most traditional lenders require to secure additional loans or lines of credit), you could sacrifice your personal credit history in the process.

When you exceed your ideal debt utilization ratio, which typically occurs when you carry a balance that is more than 30 percent of your available credit, you could actually lose access to the lowest rates available for credit, and mortgage products you use for personal use. Keeping your business finances separate also provides an accurate depiction of business income to show your accountant, financial adviser, vendors and the IRS, if you are audited.

Offer customers the payment options they want

When you give customers the option to pay for your product by their preferred means, you can expand your potential customer base — physically and virtually. In fact, about 90 percent of all transactions carried out online are paid for using credit cards. That said, including a shopping cart icon on your website doesn't mean you're equipped to accept and process payments.

Research the payment processing options that are appropriate for a business of your size, and make sure you understand whether the processor functions as a payment gateway (which securely authorizes and processes payments for e-commerce websites in tandem with the online shopping cart) or is a processor that requires that you complete the integration between the two systems.

Minimize your costs

As you compare various payment processors, make sure you understand the fee structures associated with their service, including the difference between the advertised rate and actual rate you'll pay for credit card transactions. Because payment processors absorb risk, they base their rates accordingly.

Typically, face-to-face transactions, with the customer presenting their card to the merchant at a point of sale (called a "qualified transaction") present the lowest amount of risk; fees for such transactions are typically low as well. On the contrary, when customers use a credit card that offers a rewards program, the risk of fraud increases — as do the subsequent fees you'll pay.

Online transactions generally present the highest risk of all, and carry the highest fees for merchants.

In addition to fees, both you and the payment processor carry the risk of chargeback, which occurs when a customer disputes a transaction on their credit card statement and the creditor determines they are owed a refund. When this occurs, the funds in question are debited from your account and may include an additional fee.

Formalizing your processes is one of the most effective ways to minimize chargebacks.

Provide customers with easy-to-understand written information about your service, exchange and return policies at the point of sale, and ensure the customer's online checkout experience includes details about shopping cart contents and price, taxes, fees, and shipping costs.

When you establish your merchant account with the payment processor, ensure that your business name is reflected on customer receipts and credit card statements in a manner the customer will recognize as a valid transaction.

Get paid faster

Formalizing your payment system can also ensure your work is not performed in vain. As author Erika Napoletano explains, accepting mobile credit card payments can equip you to require that clients pay a deposit before work commences. Additionally, she points out that formalizing payment processes can help you to "enforce" deadlines, such as when a client must select images so you can move forward with a project.

If a client refuses to pay after you've attempted to collect several times, formalized payment records can also support your case in small claims court, which is appropriate for claims of up to about $7,500, and typically, doesn't require hiring a lawyer.

Formalizing payments when you own a freelance business requires some effort on your part initially, but transitioning your business to function with such financial structure will simplify the amount of time, energy and risk you'll incur in building and maintaining your freelance business operations.

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