Many small business owners I speak with regularly take service or product deposits. Deposits are a great way to add extra security to your payment terms. First, however, you need to understand how deposits work, when they need to be refunded and how to make sure you are covered if you don’t intend to return a deposit in whole or in part.
Refundable & Non-Refundable Deposits
The critical aspect to consider for your customer’s deposit, other than the amount, is whether it is refundable or non-refundable and under what circumstances.
A cake-maker might take a non-refundable deposit for the reasonable cost of purchasing ingredients and setting aside time for creating a baked masterpiece. In addition, a non-refundable deposit helps protect the business owner from losing money when a customer changes their mind for a reason that has little or nothing to do with the business owner’s ability to deliver the service or the quality of the service or product.
A requested deposit should be reasonable and protect genuine business interests. For example, in the case of the cake-maker, a deposit of 50% of the total price may be reasonable to cover the cost of ingredients, whereas 90% may be a bit of stretch and could be considered unfair considering the ingredients are likely to be used in another cake.
A deposit taken from a customer cannot be retained when they cancel the service unless the deposit terms are in writing. Therefore, without clear and written terms explaining the nature of the deposit, including the terms under which any refund will be considered, a business owner must return a deposit if a customer cancels or is unhappy for a valid reason.
For non-refundable deposit terms to be enforceable you a business, the customer must be aware of them through written terms or Service Agreements. Customers must acknowledge the deposit requirement and terms, whether refundable or non-refundable, before proceeding with the service.
Attempting to retain funds as a non-refundable deposit without a written Service Agreement or Terms, after the fact, or requesting an excessive non-refundable deposit in your Service Agreement or Terms is considered an unfair penalty to the client under Australian Consumer Law.
Your Service Agreement and terms can have conditions for refundable deposits, including scenarios or reasons a deposit will be returned. It is always up to the business owner to exercise fairness AND demonstrate responsible business practices, particularly when managing refund requests. However, if you decide to keep a deposit, whether refundable or non-refundable, ensure that your deposit terms are clear, compliant with Consumer Law and written into your Service Agreement and Terms.
Deposits and Cooling Off Period
A cooling-off period isn’t a guaranteed term in a consumer contract (Service Agreement or Terms). Cooling-off periods will usually only apply in the following scenarios:
- Some types of purchase contracts for land or property;
- Unsolicited consumer agreements (door-to-door sales & telesales);
- Some contracts for the purchase of motor vehicles where the dealer also arranges the finance; and
- Contracts with real estate agents to sell a property.
Unless your business falls into one of the categories above, a cooling-off period requirement does not apply to most small businesses. However, your customers may assume they are entitled to a cooling-off period. To manage this misconception, if you intend to provide a cooling-off period to customers, your Service Agreement or terms should clarify cooling-off terms, including refund of deposit terms.
Deposits and Change of Mind
It can be frustrating when a customer requests a deposit returned for any reason. However, when a customer has accepted your Service Agreement or business terms that include a reasonable non-refundable deposit, you are generally within your rights to keep the deposit, regardless of why they no longer want to continue with the service/product.
In saying that, many businesses will return the deposit as a gesture of goodwill, even when the contract terms are clear about the non-refundable status of the deposit. You can make that call as a business owner or manager depending on the customer’s reasons, circumstances and customer relationship management in the context of your brand.
While considering what policy to set for deposit returns, you may also want to check out my Essential Business Legals Checklist for more tips on managing your business legals.
What if I don’t have a Service Agreement, Terms, or my refund policy is unclear?
If you don’t have transparent and fair contract terms in your Service Agreement or Terms and Conditions for your customers (even if you have a micro-business), you are open to customer disputes. Therefore, I encourage you to invest in your Service Agreement or Terms for your business ASAP. A small business legal template may be sufficient where your business is new and reasonably small. On the other hand, you may benefit from a custom-drafted contract if your business is more established or has a complicated purchase process.
No matter the size of your business, you need a comprehensive, easy-to-understand contract that protects your interests and establishes trust and boundaries with your customers.
Still not sure what to do? Book a 10-minute complimentary chat with me to clarify the next steps for your business.