Should My Business Contract Require a Retainer or a Deposit?

Although these terms are generally used interchangeably, they actually carry different meanings.

Many businesses may opt to collect a payment from clients at contract signing, commonly referred to as a retainer or deposit. Although many use these terms interchangeably, there are actually some nuances that give different legal meanings to each. Here, we will break down the difference to ensure you know what term is appropriate when, and why using the right word in your contract matters.

Defining the Retainer

Let’s say that you are starting a new photography business and want to collect an upfront payment as a precaution against client cancellations. In your contract, you plan to require that clients prepay a non-refundable amount to secure their event date. This is an example of a situation where you’d likely want to use the word “retainer.” This sometimes may be called a “booking fee” or “reservation fee.” Below, we will define the main characteristics of a retainer and why they are appropriate for your new business. 

1. Purpose: to secure a date or time

A retainer is generally due at the time of signing a contract and is used for securing a date or time for the client. This requirement may also help with attracting clients who are committed to following through with services. 

It is in the best interest of your new photography business to require this amount due alongside the signed contract. Together, this will reserve the client’s requested date. This gives your business scheduling assurance for events or sessions that are booked.

2. In the event of cancellation: non-refundable

Without a non-refundable payment and a signed contract, a business has no recourse upon client cancellation. The intent of this is meant to compensate you as the business owner for the hold on your schedule and administrative work performed.

Let’s say your business has taken off and you have booked 15 events, with more inquiries coming in every day. A client comes to you and requests to cancel their contracted services due to the cancellation of their event. You have had multiple other inquiries for this date that you turned down due to the hold placed for the original client. Your non-refundable retainer can provide your business with some recourse in situations of this nature.

You may also define a timeline for the refund-ability of your retainer. For example, maybe it’s refundable if they cancel 60 days before the scheduled event, but not less. You can also require additional payment if the event gets closer or if you have taken on additional costs.

3. When the contract is fully executed

Upon completion of contracted services, a business will typically apply the retainer amount to the final invoice. 

Defining the Deposit

Let’s say that you have just opened a new restaurant and plan to rent out a back room for events, but are worried about damages that may be caused by clients. In this case, it is likely more appropriate to require a deposit, rather than a retainer. Below, we will break it down and explain the applicability of a deposit. 

1. Purpose: to safeguard against damages 

Deposits are paid upfront and used for incidentals. These fees are commonly referred to as “damage deposits” or “security deposits.” With a deposit, a business has money in-hand if damage occurs at the fault of the client. 

It is in the best interest of your new restaurant to require a deposit from all clients who desire to rent the space. Accidents happen! If a client’s guest mistakenly breaks a large lamp worth $100, you will immediately have the funds to replace or repair the item.

2. In the event of cancellation: refundable

Because a deposit is a “safety net” against damages for a business, they are typically returned to the client in cases of cancellation. As the contract has been terminated, the deposit is no longer needed to guard against damages arising from it. 

If a client decides to terminate their contract with your restaurant, it would be appropriate to return their deposit. The client will no longer be using the space, and therefore will not be liable for any damages occurring during the course of their event. However, it is worth noting that the client would still be subject to whatever cancellation terms you may choose to include, which can offer protection to your business in cases of unreasonable cancellations. 

3. When the contract is fully executed

If the contract is completed and no damages are incurred, a business may return the deposit in full or apply it to the final amount owed. As mentioned in the case of cancellation, the deposit is no longer needed as a safeguard.

As the restaurant owner, you will likely want to survey the space post-event to ensure that it was left in the same or similar condition in which it was provided to the client. Upon the determination that the space was respectfully used and incurred no damage, you may invoice the client for the amount owed, minus the deposit that they had paid. Alternatively, you may return the amount directly to the client separately. How this process works depends on what your contract says. 

Although many are guilty of using the terms deposit and retainer interchangeably, it should now be clear that the terms are different. Ensuring your business is using the correct terminology will help protect with future conflict regarding the purpose and procedure for these fees paid, as well as potential legal implications or outcomes. If you are looking for more specific guidance about this terminology, or want to learn more about implementation, including important contract clauses applicable, like liquidated damages, reach out to an attorney to discuss the specific needs of your business. 

DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation and considerations with an attorney.