As a means of protecting your earnings using terms and conditions, non-refundable deposits can be a smart move if you are in an industry where a last-minute cancellation is likely to leave you out of pocket.
By asking customers to pay a deposit upfront, you ensure that you have at least part of their payment before they take delivery of whatever goods and services are involved.
This is usually not a substantial amount of money – and for instance, is generally not the same as asking for 50% of the total cost to be paid in advance due to concerns about the customer’s credit rating, or just as good practice if you are facing challenging cash flow conditions.
Instead, non-refundable deposits are generally used to cover the unavoidable outlay of providing bespoke items which may still be cancelled or simply not paid for later, or as some kind of security against cancellations of all kinds.
You should set the deposit at a sensible level – ask for an outrageous sum and you may find that even with the most plainly worded terms and conditions, non-refundable deposits deemed too punitive can be difficult to enforce.
But if you can show that the deposit is within the same order of magnitude as your cost of materials for the relevant project, or the admin cost of cancelling or rescheduling it, then you should have no problem in asking customers to pay.
One area where non-refundable deposits are particularly prevalent is in the hospitality industry, where a late cancellation can leave a hotel with an empty room for the night, or a restaurant with an empty table.
This is where things can get complicated – nobody is going to expect the deposit on a hotel room to be equal to the total cost of that room for the night, so if you cannot find a replacement guest at short notice, you may still end up out of pocket due to the cancellation.
But the point is that you have the opportunity – even if it is only very last-minute – to find a substitute customer, to stay in the room or to dine at the table, and still derive the usual profits from them doing so.
As such, the deposit is not intended to cover the full cost, but merely to provide some recompense for the inconvenience of finding a replacement customer, as well as to dissuade the original customer from cancelling.
There may be more of an exception to be made in the manufacture of bespoke items and personalised products.
Here, depending on the nature of your work, you may be left with an item that will be difficult to sell on the open market – for example because it has somebody’s name etched into it – or something that is simply impossible to sell to anyone except the original intended customer.
In this instance, you might be well within your rights to ask for a deposit that will cover at least the cost of the materials involved, and potentially a certain sum for the time and effort spent on customisation too.