Direct Debits: a guide to getting paid faster

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For years, Direct Debit was exclusively for big businesses with a large number of customers.

Technology has simplified and democratised the systems involved, meaning that any business can benefit from the speed, convenience and security of the Direct Debit system.  

You can use Direct Debits to get paid by your clients and customers, for any kind of invoices, and for any kind of services or products. It doesn’t matter if you bill your clients for different amounts, at different times. You don’t even need to bill them every month. 

You can use Direct Debit to accelerate the time it takes your small business to get paid, while eliminating much of the frustrating and time-consuming admin that normally goes hand-in-hand with credit control.

Adopting Direct Debit payments doesn’t require you to change how you invoice. You can continue sending your customers and clients invoices in the same way. You simply select the Direct Debit payment option when you create an invoice. This means you get the same flexibility that you get from standard invoicing, but with the added benefit of knowing that every invoice will be paid on time. 

Thanks to Tide’s partnership with GoCardless, the magic of Direct Debit is available to all our members.

Let’s explore some of the common questions that people have when considering using Direct Debit payments for their small business, as well as some general questions about this payment system (FAQ). 

And if that isn’t enough, you can find a glossary of Direct Debit terms at the end of this article. 

Table of contents

Using Direct Debit for your small business

Frequently Asked Questions

Glossary

Using Direct Debit for your small business

Is Direct Debit suitable for my small business?

Now, the term Direct Debit might not fill you with joy, but it absolutely should, because this feature could dramatically change your life and your business. 

If you’ve been in business for a while, you’ll know just how time-consuming, complicated and frustrating it can be to have late payments, non-payments, incorrect payments – and all manner of payment muddles – and how valuable it is to potentially sidestep these hassles with Direct Debit. 

Once you have a Direct Debit mandate established with your clients and customers, you can simply claim payment from their account when the invoice is due – or at some point before the due date. 

Your clients will appreciate the convenience and time-saving, because they no longer need to do anything at all when your invoice lands in their inbox. Instead of logging in to their bank account and sending the payment (making sure to get your invoice reference from the PDF in the email), they can ignore your invoice and carry on working. They know your invoice will be paid, automatically, by Direct Debit. Direct Debit means you can eliminate another little task for your customers and clients. 

Benefits of using Direct Debit for your small business:

  • Saves you time chasing payments
  • Eliminates the need to check your bank account constantly
  • Improves your cash flow (your money is in your account for longer)
  • Supports positive customer relationships (you won’t need to nag them for payment)
  • Reduces payment errors, oversights, and duplications from your customers

Do you need a Direct Debit facility as a small business? 

Direct Debit is a useful feature that can accelerate your book-keeping and improve your cashflow. 

So, do you need it? 

Your decision may come down to whether you spend a lot of time chasing invoices, and find that your cashflow is suffering because too many customers take a long time to pay. 

One of the most frustrating experiences in business is when you’re working hard, bringing in business, sending out invoices, but struggling to survive because too many of your clients take weeks or months to pay your invoices. 

You might be able to weather occasional payment delays, but routine late payments can be crippling, particularly if you have suppliers and staff to pay.

If this scenario sounds familiar, you might want to try collecting payments by Direct Debit. You can invoice your customers in exactly the same way, you just select the Direct Debit option when creating the invoice.

The cost of using a Direct Debit service (typically a small percentage of the payment value) is usually dwarfed by the time-savings and cashflow improvements the service delivers. 

If you’re unsure of whether Direct Debit is a worthwhile expense, consider how much time you spend chasing payments, and how many of your invoices are currently paid late. It might be difficult to value the cost of late payments, so instead you might consider the negative impacts of late payments. Have late payers ever caused you to miss a commercial target, or require a loan, or pay suppliers or salaries late? Has a cashflow crunch ever prevented you from starting a new project, or launching a new product? 

What’s the difference between Direct Debit and standing orders? 

These two might seem similar, but they’re as different as tea and coffee.

One option gives you control and flexibility so you can get paid on time. The other is a standing order.  

As a small business, you can now ask your customers to approve a Direct Debit mandate so that you can collect payments conveniently. This is great for your customers – and for you. Even if the amount owed varies from month to month, you can get paid the right amount at the right time. 

Standing orders are fixed amounts that your customers control and operate. In reality, very few customers would set up a standing order to pay you, because the amount and frequency is completely rigid. This makes the risk of incorrect payments (wrong time, wrong amount etc) unacceptably high. 

Once you have a Direct Debit mandate established with your customers and clients, you have the freedom to flexibly claim payments on time, every time.

Now that you’re on board with the value of Direct Debits for small businesses, let’s look at the process of collecting invoice payments by Direct Debit:

How do you collect invoice payments by Direct Debit?

Setting up Direct Debit is quick and easy. The first step is to find a Direct Debit provider (we’ll explain how this works with Tide in a moment). Your existing business bank may provide this option, or you may need to bolt-on a third-party service. 

Once you have set up a Direct Debit facility, you will need to send each customer a Direct Debit mandate so they can approve payments by Direct Debit. This primarily involves the customer giving you their bank details and signing an agreement. Direct Debit mandates can be created, sent, signed, and managed electronically, making the entire process quick, efficient and secure. 

You then need to set up the individual Direct Debit payments. With Tide and GoCardless, for example, this involves selecting the Direct Debit option when you create an invoice. 

You must always notify your customers before taking any payments by Direct Debit, so ensure that there is a gap of a few days before the payment is taken.

Direct Debit payments take about 3 days to process, so you may want to factor that in when you choose the payment date. 

[HIGHLIGHT BOX] Top Tip: If you want to make invoices and payments easier for your business and your customers, Tide’s partnership with GoCardless is a smart option to collect payments using Direct Debit. By saving time on your invoicing admin, you can get back to doing what you love: growing your business. Get started and sign up with Tide today.

Which small businesses should use Direct Debit?

Most small businesses benefit from using Direct Debit. You could be cleaning offices, delivering flowers, building software, providing consultancy services, or maintaining a fleet of Bentleys – it doesn’t really matter what kind of business you run. 

If you invoice your customers and clients and then wait for them to pay, then you (and your customers) will benefit by your adoption of Direct Debit. 

You might offer a subscription service, such as a support contract or a routine delivery, or you might offer instalment payment plans for expensive items. Or you may just need to invoice clients regularly for irregular amounts (e.g. graphic design, gardening, or app development).

The only businesses that would not benefit from Direct Debit are retail companies that charge customers before delivery.

How can Direct Debit improve cashflow? 

Payment by invoice is so commonplace that it’s easy to forget that this practise involves giving our customers credit. And while plenty of businesses assume that they will get 30 days (or more) to pay their suppliers, there’s no law that states this is mandatory. 

If your business struggles to operate when your customers pay 30 days after receiving your products or services, consider using Direct Debit to shrink the gap between invoice and payment.  

Improving your cashflow can improve the security of your company, enable you to grow more rapidly, and cushion any economic shocks that might occur.

How can Direct Debit help you avoid problematic customers?

You might be thinking that some of your customers may resent having to pay by Direct Debit. Especially as Direct Debits put you in control of getting paid on time. 

But the reality for most businesses is that paying supplier invoices is a time-consuming hassle. It’s easy to lose track of invoices and forget to pay people on time. Creating a Direct Debit mandate eliminates 1 task from your client’s busy schedules. 

Customers who value your contribution and intend to pay will not resent the request. If your use of Direct Debit does deter a customer, it could be because they never intended to pay you.  

Is Direct Debit payment good for small business customers?

Yes. Direct Debit is a good option for most small businesses, with very few exceptions.

Direct Debit payments give your customers and clients convenience and security. They are also covered by the Direct Debit guarantee, which means your customers can get refunded if there’s a problem.

And the fact is that most small businesses want to pay their suppliers, and they’re happy to pay on time. The primary reason why so many invoices are paid late is that small business owners and managers are working flat-out to build their businesses. Admin tasks and bookkeeping are one of the first tasks to drop off the to-do list. These tasks don’t generate revenue, so they get deprioritised. 

Giving your customers the option to pay by Direct Debit instantly removes an unproductive task from their workload.

Top Tip: How can you use Direct Debit to get paid? Using Direct Debit is quick and easy if you are a Tide customer. Tide, in collaboration with GoCardless, manage the Direct Debit mandates for you, and gives you easy controls for managing when you get paid. Spend less time managing your admin and more time building your business. Get Tide and start using Direct Debit 🎊

Direct Debits: Frequently Asked Questions

Let’s look at some of the general questions that people have about Direct Debits. 

What are Direct Debits?

Direct Debits are an agreement that you create with a customer, which allows you to claim payments from their bank accounts on an agreed schedule. The amount of the payments can vary, and you can even skip months entirely if nothing is owed. 

Once the Direct Debit mandate is approved by your customer, you can claim payment for your invoices when they are due, rather than waiting for your customer to make payment. 

How do Direct Debits work?

Direct Debits require a mandate (or Direct Debit Instruction). This is essentially a permission slip that your customer must approve so that you can claim payments by Direct Debit. 

When your customer owes you money for goods or services, you must send them an invoice, with a clear confirmation of when the payment will be collected. 

To actually create the instruction to take payment, you will need to set up a Direct Debit facility. Your bank may offer this, or you can engage a Direct Debit bureau. If you bank with Tide, you can make use of our partnership with GoCardless and simply select the Direct Debit payment option when you create the invoice. 

A network of banks ensures that the payments can be taken on time, from any UK bank account. All you need is a signed Direct Debit mandate from your customer and the capability to set up Direct Debits. The banks take care of the rest!

Can I use Direct Debits for variable payment amounts?

Yes. This is one of the most brilliant parts of the Direct Debit scheme. While other payment systems like subscription services and standing orders are ideal for regular, fixed amounts, it is easy to use Direct Debits to claim variable payments. This makes Direct Debits suitable for any kind of business – including those in service industries.

How do I make a Direct Debit payment?

Direct Debit payments are made for you. If you are paying a supplier by Direct Debit, then the money will be taken from your account on the agreed date. And if you are claiming a payment by Direct Debit, then the money should be with a few days after the collection date.

How long do Direct Debit payments take to clear?

Direct Debits are not instantaneous. For starters, you need to give your customers 10 days’ notice before taking the payment (although you may be able to agree a faster schedule with your customer and your bank). Add to this the fact that your Direct Debit provider will need a few days’ notice to add the transaction to the queue. 

Once the Direct Debit payment is claimed, it takes about 3 days to reach your bank account. 

Is paying by Direct Debit safe?

The Direct Debit system has been operating in the UK since the late 1960s, so it is thoroughly tried and tested. Underpinned by the Direct Debit Guarantee, your customers have the option to have any payment refunded if it has been taken in error, and to cancel the Direct Debit mandate at any time, for any reason. The Direct Debit Guarantee also enshrines a customer’s right to be notified before any payment is taken. 

How much does Direct Debit cost?

As you would expect, there is a small cost for using the Direct Debit service. This covers the administration of the service and the management and all the technology that makes it work. Most Direct Debit providers charge a small percentage for every Direct Debit payment, usually capped at a maximum fee. 

Glossary of Direct Debit terms

The Direct Debit system is simple to work with, but requires some complexity behind the scenes. You probably won’t encounter many of these terms if you set up Direct Debit payments with Tide and GoCardless, but here’s our glossary of terms in case you want to know more.

Advance notice

Before taking any Direct Debit payment, you must notify your customers, at least 10 days before the payment is due. It may be possible to reduce this period if you negotiate with your customers and your bank beforehand. 

AUDDIS

The Automated Direct Debit Instruction Service. This is something that banks use to manage Direct Debit transactions. 

Bacs

Bankers’ Automated Clearing Services. This is the clearing system that all banks use to share Direct Debit information.

Counter claim

If your customer believes that a Direct Debit has been taken in error, they can request a refund under the Direct Debit Guarantee. This refund request is also called Indemnity Claim. If you believe that the payment was correct, and the payment should be taken, you can raise a counter claim. 

DDICA

A Direct Debit Indemnity Claim Advice message is what you receive when a customer requests a refund under the Direct Debit Guarantee.

Direct Debit Guarantee

The Direct Debit protects customers from incorrect payments, and provides a mechanism for correcting any mistakes that occur. Specifically, the Direct Debit Guarantee ensures that customers are notified before payments are taken, gives customers the option to cancel the agreement at any time, and ensures that customers can get refunded when payments are taken in error.

Direct Debit instruction / mandate

The agreement established between a business and their customer. This can be done with a paper form, or an electronic form that the customer completes, including the details of their bank. The agreement must be saved by the business that collects payment.

Due date

The date on which the payment is taken from the customer’s bank account. Direct Debit payments take a few days to clear, so if you arrange a Direct Debit payment to be taken on the 1st day of the month, it should be in your account on the 4th

Indemnity claim

If a customer believes that a Direct Debit payment was taken in error, they can make a refund request, known as an indemnity claim. 

SEPA Direct Debit

SEPA Direct Debits allow you to claim payments from customers across Europe. SEPA stands for Single Euro Payments Area, which is an EU scheme to simplify payments across European countries. 

Service User Number (SUN)

This is a number given to a bank or service that has privileges to manage Direct Debit payments. If you are a small business using a service like Tide & GoCardless to manage Direct Debits, you probably won’t need to know about SUNs.

Photo by Christina Morillo, published on Pexels

Shahree Zin

Partnerships Executive and small business accounting advocate

Tide Team

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