Choosing to refund client payments is never an easy decision. In some cases, it can mean dropping into the red while everything gets sorted out.
Refunds are also an unavoidable part of conducting any type of client-based business.
But by understanding why client refunds are an integral part of a healthy business, you can better determine when this course of action is the best option.
With the rising consumer utilization of chargebacks, however, whether or not to offer a refund is becoming a decision business owners have less and less control over.
At this rate, chargebacks could cost retailers close to $25 billion dollars by 2020 when there are other, more appropriate solutions available.
Fortunately, freelancers and service-based businesses aren’t as easy of a target for these consumer practices. Still, knowing the when, how, and why of refunding clients can further protect you from chargebacks and other unpleasant consequences.
So, where do you start?
Prepare for Client Refund Requests from the Start
When it comes to protecting you and your business from unscrupulous clients, everything starts with your contract.
Of course, this is also true when it comes to refunding client payments.
Before you enter into an agreement with any prospective client, you should have your refund policies clearly outlined in your contract.
With any luck, you won’t need to use them. But if you do, you’ll be grateful you took the time to draft and include these policies in your contract.
Your finalized refund policies will ultimately depend on your business model and the type of client relationships your foster. One of the biggest factors to consider when drafting these policies is whether you provide clients with a product, service, or something in-between.
Product-based refunds are actually some of the most straightforward. However, they also require the most detailed refund policies.
If your business is based on selling products to customers, then (at minimum) you’ll want to include a few things in your policies:
- Time period wherein a refund may be honored
- Applicable fees, such as return shipping or restocking costs
- Form of the refund
- Products not eligible for a refund, such as digital or customized goods
While you may or may not rely on a contract for most of your customers, these policies should always be available to all current or prospective customers.
The last thing you want to do is keep your refund policy a secret.
Drafting refund policies for a service-based business is a bit trickier. Rather than relying on clear-cut policies, you’ll handle most refunds on a case-by-case basis.
Still, it’s a good idea to clearly lay out your expectations in your contract, even if you just say that refunds are entirely subject to your discretion. This will ensure both you and your client are on the same page.
When to Refund Client Payments (And When to Say No)
Because service-based businesses need to handle refunds on an individual basis, knowing when to extend such an offer isn’t easy.
At the same time, waiting until a client actually comes forward with a complaint or refund request will leave you scrambling to make a decision. Remember, that decision comes with real consequences.
But what are the appropriate reasons to issue a refund to a past or current client? And how do you know when giving into a refund request will actually benefit your business?
Refund: You can’t deliver
Perhaps the most common reason to issue a client refund is that you just can’t deliver on the promised services.
There could be a variety of reasons for this — unexpected illness, family emergency, or drastic miscommunication are all common scenarios. Whatever the cause, though, if you can’t deliver your end of the deal, the client shouldn’t be expected to pay.
Don’t refund: Your client interfered with the project
With that in mind, there may be cases where you can’t deliver at no fault of your own.
For instance, clients will sometimes withhold critical information that stops a project in its tracks. When this or a similar situation occurs, you need to have some sort of protection in place for the work already completed.
If your client gets in the way of completing their agreed work, then there’s no reason to accept a refund request.
In fact, many freelancers will include penalties in their contracts for such cases. This ensures that you don’t just get paid for your work, but that you are compensated for the delays caused by your client.
Refund: You gain more from refunding than not
At the end of the day, issuing a refund is purely a business decision. In other words, your decision of whether to refund or not should not come from your ego or personal emotions.
Instead, deciding to refund should depend on whether doing so will ultimately help or hurt your business.
You might be wondering how issuing a refund could really benefit your business. However, there are many scenarios where this could be the case:
Would refusing a refund likely end in a poor reputation among your client’s peers?
Is the cost of the requested refund less than you could earn from continuing to work with the client in the future?
Do you think the client would win if they chose to pursue legal action concerning the refund?
In any of these scenarios, issuing a refund is almost always the smarter choice.
Don’t refund: Your client changed their mind
In freelancing, changes to your projects are inevitable. But what if you’ve already completed the work?
In the end, it’s no one’s fault but your client’s for wanting to part ways with the project and take things in a different direction. Because of this, there are very, very few such cases where issuing a refund is appropriate and fair.
Refund: It’s in everyone’s best interest to cancel the project
Building long-lasting client relationships is the key to a successful business. However, there will likely come a time when your business and your client’s needs no longer mesh.
If you find yourself with an ongoing client whose needs no longer match your main service offerings, then refunding might be the better option for all parties involved.
Many freelancers feel they’re locked into a work agreement once payment has been made. But making the decision to sit down with your client and extend a refund could be the right choice.
In these cases, it’s crucial to communicate with your client — especially if you’re the first one to bring up canceling the contract.
Be sure to explain why you think your services aren’t the right fit for them. If possible, try to suggest other entrepreneurs who might be able to better accommodate their needs.
Take the Stress out of Refunding Clients
Ideally, issuing client refunds shouldn’t be a regular part of your business. But for those cases when going forward with a refund is the right decision, you can make the whole process a little bit easier by following some basic bookkeeping practices.
Creating, sending, and settling invoices is a chore no one truly enjoys. If you still rely on paper invoicing for your business, then this is even more true.
And if you find yourself needing to issue a refund, the amount of work that goes into a single invoice can instantly double. Plus, you need to deal with the technicalities of returning payment, whether in the form of a check, account statement, or some other form entirely.
Instead, consider switching over to a streamlined invoicing and payment system, such as invoicely.
Along with expense tracking, in-line payments, and customizable invoice templates, invoicely makes it super easy to track and issue refunds to your clients.
Should you be refunding clients left and right? No!
But with a program like invoicely, you can rest a little easier knowing that all of your business’ finance information is in one place when you need it most.
Learn more about how invoicely can help you manage invoices, issue refunds, and everything in-between.