When a contractor does great work for you, it’s natural to want to compensate them generously. Being generous with others isn’t just a selfless act; it makes you feel good, too. In fact, researchers at the University of Michigan proved that being generous improves your mental and physical health, and promotes longevity.
Is Your Business Partner Being Too Generous?
Most people have been underpaid and undervalued in their line of work, so it’s admirable to extend your generosity in every direction. However, there are considerations you need to make first, especially when you’re in an equal partnership where you both have control over finances:
1. Can You Trust Your Partner with Financial Decisions?
There’s no way around it — a person will carry their personal financial habits into their business. If your partner casually spends money without regard for paying bills, that habit will surface in your business.
You can spot this pattern by observing how they handle personal debt.
Responsible behavior to look for includes:
- They’re actively resolving their debt. Responsible people do fall into debt, so the existence of personal debt isn’t a red flag by itself. A good business partner will be in the process of reducing or consolidating their personal debt rather than ignoring it.
- They’re taking unconventional action. A responsible person will actively do everything in their power to handle their debts. If they have a credit card, they’ll pay it down, even between billing cycles, to avoid compounded interest. Debt relief experts from The Rowdy G. Williams Law Firm explain compounded interest, “You need to understand that your interest rate is charged on a daily basis. So for example, if your APR is 15 percent, if you divide that by a year (365 days), then that means you’re getting charged a total of 0.041 percent interest on your unpaid balance every day.” This high level of attention to detail is a sign that your business partner takes financial obligations seriously.
Red flag behavior includes:
- They blame someone else for their debt. Interest rates are sky high, and some credit card companies do have fine print that works against the consumer. However, blaming the credit card company, or anyone else, is a red flag. Debt Roundup makes this point clear, “You can’t just blame a credit card for your problems. It didn’t do it. It doesn’t just jump out of your wallet and scan itself at the cash register. It doesn’t just decide to not pay itself off each month and float balances.” You want a partner who will take full responsibility in the face of any situation, whether or not they created it.
2. Are Your Compensation Decisions Financially Wise?
Consider that you and your partner will make major financial decisions together, and may need to trust each other to make smaller decisions alone. You need to know that your partner is going to act in the best interests of the business at all times. This includes offering appropriate compensation to potential contractors.
Offering too much back end compensation to contractors isn’t wise. Neither is offering percentages of profits to contractors.
3. What is the True Cost of Promising Back End Compensation?
Maybe you need a website and your partner knows a developer. He or she might offer the developer back end compensation of $3,000 for designing your website. This sounds fair, but what happens when the same kind of deal is offered to a graphic designer, a photographer, a videographer, a content writer, and other contractors?
Your business could rack up a $15,000+ debt quickly if you don’t diligently crunch numbers before entering into these back end agreements.
There’s nothing wrong with paying contractors on the back end if they’re willing to provide the work up front. The problem is that you’ll owe multiple people who will be expecting to receive their payments at the same time.
4. What the Problem with Offering Percentages to Contractors?
With sufficient funding in hand, you probably wouldn’t offer 2 percent of your profits to the contractor who customized your WordPress theme. The only reason someone would consider this type of deal is when they don’t have the capital to pay up front, and don’t know how much that 2 percent cut really costs.
Contractor Compensation Should be a Joint Decision
You and your partner should always make decisions on how to compensate your contractors together. That way, you won’t be surprised by finding out your partner offered his or her cousin part of the company’s profits for getting you out of a jam.