Small businesses in the UK are dearly in need of a reliable method of collecting payments. According to Bacs Payment Schemes Limited, a total of £14.2 billion worth of overdue payments were recorded in 2017 alone. Small and medium-sized enterprises (SMEs) make up almost 99% of the UK’s private business sector, and they’re uniquely vulnerable to problems stemming from late payments.
These unpaid invoices or late payments lead toareduced cashflow, especially for businesses that provide recurring services. Prolonged cashflow issues in turn reduce these businesses’ working capital. This may cause serious debts and intheworst cases can even lead to bankruptcy. Oneeffective way to combat cashflow issues is to providea payment method that puts you in control — a method where you define when you get paid and how often. This is whereDirectDebit comes in.
What is Direct Debit payment?
TheDirect Debitscheme is a popular payment method in the UK,in which customers authorise merchants ororganisations to pull funds from their bank accounts.AllDirect Debitpayments are handled byBacs (Bankers’AutomatedClearingServices),a central payment networkthat processes several different types of electronic payments.Direct Debit is usually used for making recurring payments like credit card bills, utility bills, instalment payments, rent, recurring retainer payments andsubscriptions/memberships.
Advantages and benefits of Direct Debit for businesses
Let us look at some of the benefits that Direct Debit has to offer:
- Helps you gain trust: If you are an organisation orbusiness taking payments through the Direct Debit scheme, you’ll be subjected toathorough examination andmonitored closely bybanks. Thisconstantscrutiny willmake your business more transparent,enabling youto gain the trust of your customers.
- Timely payments: Direct Debit allows business owners to get their payments on time, avoiding the risks and issues involved in late payments.
- Better cashflow: With Direct Debit, payments for the services andproducts you offerare ensured.This leads to better cashflow. Better cashflow, in turn, leads tohealthy working capital. Withhealthy capital, you can run your business smoothly.
- Direct Debit Guarantee: The Direct Debit Guarantee is a set of protocols followed by banks that accept instructions to pay direct debits. These policiesmainly favour the customers and ensure that customers are not liable for incorrect payments.Businesses using the Direct Debit scheme should be very careful about the time periods andamounts of the payments they initiate, because the Direct Debit Guarantee refunds the money immediately in the event of an error in payment.
- Set-and-forget: The ease of set-up and the fact that the customer doesn’t need to go to the trouble of making payments each time, makes this payment method a must for all businesses in the UK. By providing the direct debit option for your customers, you make it easier for them to pay you with minimal intervention and this will be a huge plus for conducting business with you.
- Lower failure rate: The overall failure rate at GoCardless for direct debit payments is 2.2%. This is very less when compared to the higher failure rates (5-18%) seen with credit card transactions.
How does Direct Debit work?
To set up Direct Debit, you must get an authorisation from your customer to pull funds from their accounts.Once you get the authorisation, you can take recurring payments from the customer’s account.You’ll be required to send a notice to the customer 10 working days before the actual transaction, informing them of the amount and the date.The only thing the customers need to do is to ensure that they have sufficient funds in their account.
Here’s an illustration explaining the bank-to-bank transfer in Direct Debit.
The business owner initiates the payment after setting up Direct Debit fortheir customer.The amount of payment and the date of the payment initiation should alwaysmatch the advance notice you send to your customer.Funds from the customer’s bank account go through the Bacs cycle.For the first transaction, it takes five working days for the amount to settle in the business owner’s bank account, butsubsequent transactionswill be processed in three working days.
How to set up Direct Debit to start taking customer payments
To start taking funds froma customer’saccount, you need to follow these steps.
- Step 1: Prepare a mandate orauthorisation documentfor your customerto sign. A mandateshould contain the following details:
- Account holder’s name
- Bank/building society account number
- Branch sort code
- Bank/building society’s full postal address
- Account holder’s contact details
- Service User Number (SUN) of the originator(auto-filled)
- Payment date
- Payment amount
You cancollect these details by sending your customer a hardcopyof theformoronline form to fill out and send back to you. You can also use a telephone call for collecting your customer’s details, but the script has to be approved by a bank.
- Step 2: Get the mandatebackfrom the customer and submit it toyour bank.Most banks usually take about 4-6 days to activate a mandate.
- Step3: Once the mandate is active, you are required to notify your customers 10 daysbefore initiating the actual payment. It takes 3-5 working daysafter the payment datefor thefunds to settle in your account. If you initiate a payment and it fails, you’ll receive a message from Bacs notifyingyou ofthe reason for failure. You will then need to speak to your customers to clarify the situation.
How to access Direct Debit
Bacs providesdifferent options for accessingthedirect debit scheme. You can select the most suitable method based onyour organisation’s financial standing, administrative capabilities andvolume of transactions.
There are two methods of accessingtheDirect Debit scheme:
- Direct access via a bank
- Access viaaDirect Debit bureau
Direct access via a bank:
Large businesses ororganisationsthat can manage the Direct Debit processby themselves opt for thedirectaccess method. The organisations using the direct access methodare known asdirect submitters. Direct access has the lowest transaction fees but the initial setup cost is very high. For businesses handling large volumes of recurring payments, the low transaction costs outweigh the initial overhead expenses.
The first step tobecome a direct submitter is to apply for a Service User Number (SUN). Obtaining a SUN is not aparticularlyswiftor easy process — it can take months, andbanks usually reject businessesthat have a small turnover ordon’t seem equipped enoughto handleDirectDebit on their own. If your businessmeets the following criteria, then the bank mightapprove you andprovide you withaSUN.
- Revenuegreater than £1 million (some banks even have a threshold of £10 million).Your businessneeds a huge turnover toevenbeconsidered forapproval.
- Well-equipped withboththe workforce and the technical expertise required to handle the workloadthat comes with direct access.
If you get approved for a SUN, youwillhave tobuild a system in-house to collect, store and submit the necessary information to Bacs.Bacs approveddirect debit management software provides an integrated platform for accessing a range of Direct Debit schemes.
Access via Direct Debit bureau:
If youdon’t have the necessary turnover or justwant to be free from all the extra work of handling Direct Debit in-house, you can use a Direct Debit bureau. Direct Debit bureaus are third-party organisations that handle direct debit payments and most of the work related tothem on your behalf.
Traditional bureaus only handle the Bacs submission process,soyou stillhave to collect the mandates yourself.The bureauprocuresyour customers’ detailsfrom you and handles all the paperwork likeBacs submission and payment details.
Whenusing a third-party bureau, you can useeitheryour own SUN (Service User Number) or the bureau’s SUNto make payments. The best option is to use your own SUN, because only the name ofyour business is shown on your customer’s bank statements.But if you need the payments to start quickly andyou don’t mind the bureau’s name on your customer’s transactions, you can opt for using the bureau’s SUN.
Depending onwhich bureau you choose, it might charge you for the setup of your account, for monthly usage,andfor every transaction and submission.Some bureausalso charge a penalty for each failed payment.Traditional bureauscan be somewhat non-transparentabout theircosts,soyoumay want to use an online Direct Debit provider instead. Online Direct Debit providers generally offer better features at meagre costs for setup and transactions. Some online providerseven sendcustomermandates for you. You just have to direct your customers to your online provider and they will take care of the rest.
Direct debit is a simple and sensible alternative that gives you complete control overyour payments, including recurring payments.Its low failure rate and minimal need for manual intervention make it appealing to customers and businesses alike.
So if you are providing recurring services in the UK and are in search ofthe best payment methodfor your business,Direct Debit is an option that has potential to help you maintain a healthy cashflow.
