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A Guide To Direct Debit for Small Businesses

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A Guide To Direct Debit for Small Businesses

There are many advantages to being a small business owner but it also has its challenges. Small businesses are heavily reliant on cash flow to stay afloat, especially when they are just starting out. A small business can’t afford to have bad debt and ineffective payment collection has been the downfall of many a small business owner. Payment collection is a vital part of keeping your business out of the red and your cash flow healthy. But it is also a time-consuming process and small businesses don’t always have the resources and staff members that can dedicate the majority of their time to payment collection and this can have serious knock-on effects for their business’ financial health.

But don’t despair, there are ways to get paid without constantly chasing up bad debtors and late payers. Direct Debit is a great way for small businesses to guarantee regular payment collection. If you provide a monthly service to your clients, with Direct Debit you won’t have to worry about trying to collect your money at the end of every month and you will be able to invest your time and energy into the day-to-day running of your business while the payment collection takes care of itself.

 

What Is A Direct Debit & How Does It Work?

Most of us are familiar with Direct Debit payments for recurring services and utilities, but as a small business owner, you may not be familiar with how Direct Debit can make your payment collections easier and more effective. In simple terms, a Direct Debit is an automated method of payment that is one of the most efficient ways for any business, regardless of size or services, to collect payments from customers. Basically, a Direct Debit allows a company to directly draw payments from the bank account of their customer.

 

What Is The Difference Between A Direct Debit And A Standing Order?

The main difference between a Standing Order and a Direct Debit is how the payment is controlled. In the case of a Standing Order, the payment is controlled by the customer. They will set up the Standing Order and give the bank the payment instructions. A Direct Debit, however, puts control in the hands of the business. When using a Direct Debit as a form of payment, the control lies predominately with the business once the customer has signed the authorisation papers to apply the Direct Debit to the customer’s bank account. This gives you more control over your payment collections.

 

Advantages Of Collecting Payments By Direct Debit

There are a number of benefits for small businesses to collecting payments using a Direct Debit solution:

  • Direct Debits make it easier to control your cash flow.
  • It is also easier to budget if you have a fixed schedule of payments and you know in advance how much will be paid into your account on which days of the month.
  • There is less danger of late payments because the payment is predetermined by the Debit Order.
  • Besides the initial paperwork to authorise the Direct Debit mandate, the reduction of paperwork is significant. This means that your admin staff can focus on other work rather than chasing up late payments.

 

Why Do You Need To Collect Payments via Direct Debit?

Collecting payments using a Direct Debit system is quick and easy. All you need is a Direct Debit mandate, also known as a Direct Debit instruction, to collect payments directly from a customer’s bank account. The customer has to sign the Direct Debit mandate to authorise the payment of funds from their bank account to your small business account.

You also require a Service User Number (SUN). This is a unique identifier used by banks and businesses to collect payments via Direct Debit. The Service User Number enables all steps in the payment collection process to be tracked, verified, stored and recorded. The Service User Number is the most effective way to track Direct Debit payments.

 

What Is The Timeframe for Direct Debit Payments?

Direct Debit transactions, unlike credit or debit card payments, do not clear immediately and the process typically takes up to three days before the money is available in your business account. But even if it takes a few days, at least you know when the payment is coming and can budget accordingly.

 

Can You Make Multiple Payment Collections Using Direct Debits?

Direct Debits are useful for small businesses because they are not limited to one payment a month and once the Direct Debit has been set up and authorised, you can make collections at any time. Another advantage of Direct Debit payment collections for small businesses in Britain is that thanks to SEPA (Single Euro Payments Area), you can collect payments within any of the 34 SEPA countries and associated territories in Europe.

 

Disadvantages of Direct Debit Payment Collections For Small Businesses

No system is perfect and no matter how you plan to collect your business payments, there will always be one or two drawbacks, and it is no different if you are using Direct Debit. In isolated cases transactions can be charged back, leaving your business without the anticipated funds. As with any system, there are also cases of fraud and disputes from customers who do not want to pay. If you use a Direct Debit payment collection system, the onus is on you to inform customers in advance that the funds will be taken out of their account and if you fail to do so, they can request a chargeback or block the transaction.

Before you decide to use a Direct Debit payment collection system for your small business, you need to look at all the advantages and disadvantages and decide what solution will work best for your business.

The Financial Management Centre in High Wycombe can give you more detailed information about the implementation of Direct Debit payment collection services for any size business in the UK. We can provide you with the best financial management solutions for your company, including; bookkeeping services, VAT services, management and accounting reporting, payroll services, business plans, budgeting and projections, year-end accounts and tax services, and credit control.