Taking Deposits Properly

Why deposits work

A deposit shifts risk from you to the customer at the one moment you have maximum leverage — before any work begins. It does two jobs at once. First, it funds your early costs, so you are not paying for materials or labour out of your own pocket against a promise. Second, it tests commitment: a customer who hesitates to put any money down is showing you something useful before you have invested a cent.

For that reason a deposit is the most efficient credit control available. It costs nothing to ask for, screens out time-wasters, and reduces the amount you can ultimately be left chasing. On larger or longer jobs especially, starting work with nothing in hand is an avoidable gamble.

Setting the amount

Set the deposit to cover your real up-front exposure plus a meaningful commitment. If a job requires you to buy materials before you can begin, the deposit should at least cover that outlay, so a customer who walks away does not leave you out of pocket. Beyond cost recovery, the deposit should be large enough that the customer has genuine skin in the game.

Avoid the two extremes. A token deposit neither funds your costs nor tests commitment. An excessive one can deter legitimate customers and may raise fairness questions if the job never proceeds. Pitch it to your trade's norms and the specific job, and be ready to explain the figure as a reasonable reflection of your early costs and risk.

Document it clearly

A deposit only protects you if its terms are written down and agreed before payment. Spell out the amount, when it is due, what it applies to, and how it is treated against the final invoice — typically deducted from the total so the customer can see it credited. Issue a proper invoice or receipt for the deposit — clear invoice templates make that a two-minute job — so there is a clean record on both sides.

The most important clause to settle in advance is refundability. State plainly whether the deposit is refundable, partly refundable, or non-refundable, and in what circumstances — for instance, retained to cover costs already incurred if the customer cancels. An undocumented deposit is the source of many disputes; a written one removes the argument before it starts.

Refunds, GST and records

Refundability needs care. A blanket 'non-refundable' deposit that bears no relation to your actual loss can be challenged, so tie any retention to genuine costs or losses incurred when a customer pulls out. The fair, defensible position is usually to keep enough to cover what the cancellation actually cost you and return the rest. Set the rule up front and apply it consistently.

Deposits also have a tax dimension. Depending on the arrangement, GST may be triggered when the deposit is paid or applied, and the treatment differs for a true security deposit versus a part-payment. This is genuinely technical, so confirm the correct approach with your accountant rather than assuming. Whatever the treatment, record the deposit properly so it reconciles cleanly against the final invoice later.