Original Article: Effects of Chargeback
New freelancers get excited about owning a business and look forward to being paid directly for full-scale projects or micro-jobs. The majority of freelancers use some form of online payment processing tool to receive payments. Some freelancers use tools that allow clients to pay by credit card, and others use payment processors such as PayPal, Skrill, or Payoneer.
As a freelancer, you’ll feel excited to receive your first real payment! You’ve finally worked directly with a client and earned real money! It may come as a surprise that there is typically a fee for receipt of an online payment. It’s usually a small percentage, and most freelancers can accept that. Some don’t really begin to think much about fees and taxes until they are already earning money.
Everything may go well for a while. One day, the freelancer sits down to work and sees that something has gone wrong. The freelancer worked hard to deliver a high-quality product, and the client expressed satisfaction. But the client has asked for a refund and received it without the freelancer’s permission. How does this happen?
We all know that it’s possible for people to make an unauthorized purchase by using a stolen credit card, hacking into an online account, or using a payment processor without the permission of the owner. In these situations, the purchaser can file a claim for a forced refund. A forced refund is called a chargeback, and it’s a valuable tool to protect everyone from losing money on unauthorized or fraudulent transactions.
It’s surprisingly easy to get a refund. The purchaser typically files a claim saying that the payment was not authorized. The merchant must return the funds. The unsuspecting freelancer returns to the office and finds that the funds have been deducted. In some cases, there are additional chargeback fees. This can happen weeks or even months after a transaction has occurred.
It has, unfortunately, become more common for shady individuals or businesses to file fraudulent chargebacks to get free goods and services. This leaves the freelancer in a very vulnerable position. An uninformed freelancer can start out with nothing, earn some money while getting the business running, then lose the money plus fees and end up with a negative balance.
There are some things freelancers can do to mitigate risk. The first line of defense is to vet the clients. If you are a freelancer with a new client, see if you can do a little research on the person or business. Start out with a small job, and make sure that things go well. Don’t take on larger projects until you’ve established a business relationship.
Freelancers can also prepare themselves before a chargeback happens. It is a good idea to have funds set aside to cover unexpected expenses. As a freelancer, research the tax laws in your area to see how you can handle chargebacks as losses. There are even some payment processors that offer coverage for chargebacks and companies that sell chargeback insurance.
In the long run, chargebacks can be a painful part of the freelancing lifestyle. There are few ways to avoid them completely since payment via cash, direct deposit, or wire transfer is difficult and high-risk for the client. The important thing is for freelancers to be aware that they can happen and be prepared with strategies to handle them.