Why You Should Ask Your Customers to Leave a Deposit

Jun 17, 2012

Joe Griffin decided he’d start having his customers leave deposits on work done at Joe Griffin’s Custom Upholstery, the Oakland, Tennessee, shop he’s operated for 34 years, after he got stuck with an interior kit a customer changed their mind about.

He now asks for the cost of materials on made-to-order kits and a 50-percent deposit on custom jobs.

“We don’t have money tied up in a lot of different jobs,” he said. “If we get a deposit and they change their mind for some reason, then we’re not stuck with the cost of whatever it is.”

There are a number of reasons why a shop will decide to ask for a deposit, including personal experiences like Griffin’s, but whatever their motivation, shops that are taking a down payment on projects are experiencing various financial and operational benefits.

Keeping Cash Flowing

Like in Griffin’s case, it took a bad experience to make Ray Younkin realize it was wiser to invest his customers’ money in parts and labor than his own.

“Early on, I had a guy drop a car off and he didn’t make a deposit, and when we got the car all tor[n] apart he said, ‘Well, I can’t afford to do it, I want my car back,’ so we were out the labor,” said Younkin, owner of StripMasters, a 16-year-old media-blasting and muscle-car-building shop in Milton, Florida. “That’s when we decided to take the deposit and at least we get paid for our labor, and then when we give them the rest of the news, what all he needs, then we go from there.”

Jamie Hamilton created his deposit and payment system after both consulting with other shop owners and gaining his own experience.

“I’d talked to a few other people that had been doing [restoration] work and there were some complaints of getting into a project and having trouble getting paid once you were done so I just made the decision from the start that I would ask for a deposit further,” said Hamilton, who owns Hamilton’s Restoration & Garage, a former general repair shop in Havelock, Ontario, Canada, that’s been doing restorations for 12 years. “Now I’m working on a scale that once I have about $4,000 of my own money tied up, I’m looking for more money from the customer before I proceed.”

Having cash on hand is vital when it comes time to order parts.

“[Asking for a deposit] gives us cash flow, [so] we don’t have to allocate some money out for parts, because you’ve got to pay cash for almost everything you buy [now],” said Terry “Zeke” Maxwell, manager for the service and restoration business at John Scotti Muscle Cars et Classiques in St-Leonard, Quebec, Canada, a performance restoration facility. “I just plac[ed] orders for $5,000-“6,000 of parts for two cars, and that’s not even half the parts we’re going to need to finish them, but this way here at least we don’t have the cash out.”

That deposit can act as insurance, too.

“If you start a project for someone without a deposit, then you get six or seven weeks into it and they call you up and say, ‘I don’t want to do it now,’ all that money that I’ve taken out of my pocket and put into the project is in limbo until I can either sell it or recoup it another way,” said Jim Hamric, owner of Hammertime Street Rods, a six-year-old restoration shop in Springboro, Ohio. “If you build a complete car, you can have as much as $40,000-“50,000 tied up in parts before you even start it, and if someone backs out on you, then you’ve got your equity or your funds tied up in that, and then it’s a deal where you have to either sell or try to get the customer to go on ahead and complete the project.”

That money, and the customer assurances it brings, are operational essentials to some shops.

“It all boils down to basic business, you have to have an established cash flow, especially with project cars” said Bill Petruniak, president of Mileage Master Automotive, a 20-year-old classic car restoration and late-model diagnostics shop in Melvindale, Michigan. “Vehicles can come to the shop and be here for six months or a year, and a restoration could be $30,000 or $40,000 or $50,000. That’s an awful lot of money to be putting out of the business’ pocket, so we have to defray that and keep our cash flowing,”

Putting down a deposit can also benefit the customer financially, especially when it comes time to make the final payment.

“I’ve got a guy that does my transmissions and he does the same thing with his transmission customers, even if it’s just a $1,500 or an $1,800 job, he’s found that if he gets $500 down or $700, it’s a lot easier for the customer to come up with the balance, and then the customer is pretty much invested in the whole service then and they’re more interested in what’s going on, they want to get their car back quicker,” said Jeff Blosdale, owner of How Fast Motorsports, a four-year-old restoration, performance and maintenance shop in Vista, California. “It just seems to make the customer more involved and … frees up some cash flow for us guys with smaller shops that [have] employees we have to take care of.”

Developing a Good Working Relationship

Getting the customer more directly involved with the build is another benefit of asking for deposits.

“The larger the deposit you can get from your customer, the customer has now become a partner in the project with you-”you have your time and your shop’s time invested in it, and now he has a financial investment in it as well,” said Alex Denysenko, CEO of Moneymaker Racing in La Porte, Indiana, a speed shop specializing in muscle cars that opened in 1996. “If you don’t, all you have is that customer’s car, he has no viable investment in it either, and, consequently will treat it as such and, many times, as an abandonment.”

The deposit can create a more even partnership between the shop and the customer.

“The main reason I like a deposit is it makes a commitment on both ends-”you’re committed to get to work and they’ve already committed an amount of money to start a project,” Younkin said. “I believe in working on the customer’s money more than my money, especially shops doing multiple cars, legitimate shops with overhead. We pay 100 percent healthcare for our [five[ workers, so it just helps the cash flow keep moving and it gives you an incentive to get to work because [the customer’s] left you money to get to work, and you’re not worried about the first payment.”

There may be customers who don’t feel secure about handing over money before any work is done, so take extra care to explain why a deposit must be left.

“Some customers will be leery just due to the fact that they want to see the work first,” said Randy Lofquist, owner of Dynamic Rides, an eight-year-old full-service street rod shop in Kearney, Nebraska. “In fact, I’ve had a lot of customers in the last eight years that have been bitten by other shops and have not had good work done and they’ve given a big deposit or money down and then lost that money, and so they’re a little gun shy when they come in, but you have to stick to your guns. Also, if they’re not willing to invest in you, then you’re probably not the shop for them. They’re not serious enough about the project to really be your customer, so you can kind of weed out the good and the bad customers.”

“Just be up front with them, they realize you’re in business to make a living,” Petruniak suggested. “Our customers generally understand that pretty well and are more than happy to help us stay in business so we can keep their projects getting done. If someone doesn’t like the system -¦ that’s not a good starting point. If they don’t like the way we do business, then they probably should look elsewhere.”

Shops that do ask for deposits can’t imagine operating their shops any other way.

“I don’t know that I could run a business without it, or at least a restoration business without it because it kind of gives accountability to the customer,” Lofquist said. “If something like [leaving a deposit] scares them as far as the amount of money, then they’re not prepared to go into a restoration project and what they’re about to face. [I]t gives us a working capital and it kind of keeps everybody honest, and as long as we’re doing our job and proving to the customer that we’re not just going out and blowing their $10,000 and then not working on their car, then everybody’s happy. It really is about the only way that I could conduct business.”