How can contractors protect themselves from bad debts?

Requiring upfront payments or progress payments during a project is an effective strategy for contractors to protect themselves from bad debts. This approach ensures a flow of cash throughout the project lifespan and mitigates the risk of non-payment upon project completion. Upfront payments provide financial security to the contractor, allowing for the first stages of the project to be funded. Progress payments keep both the contractor and the client engaged and ensure that the contractor is compensated for the work completed, reducing reliance on the client’s final payment and minimizing potential losses.

Using informal agreements may lead to misunderstandings and disputes later on, making them less reliable. Not allowing any credit could limit potential business opportunities, as clients may prefer options with some level of credit or flexibility. Delaying payments until project completion poses a significant risk, as it leaves the contractor vulnerable to the possibility of non-payment after committing time and resources to a project. Therefore, requiring upfront or progress payments is a balanced strategy that not only safeguards against bad debts but also helps maintain healthy cash flow throughout the project.