What is direct debit payments for small businesses?

Apr 05, 2024

Late payments and unpaid invoices can be extremely damaging for any business as they oppress the cash flow and the working capital of the business.

The situation is worse for businesses that deal with providing regular services. In such a scenario, a business is forced to take on debt, and this might aggravate the situation.

The solution to getting control over your cash flow is by setting payment methods that put you in authority. A payment channel or terms where you set the rules of the frequency and amount of payments. This is where direct debit payments jump in. 

What is direct debit payment?

Direct debit payment solutions are those that allow you to collect payments straight from the customer’s bank account without them having to approve every transaction.

This method of collecting payments can also include taking payments from the customer’s credit account. It is a convenient, safe, and fast way of getting paid.

Basically, the direct debit payment method means that the customer gives the supplier authority to take payments from their bank account. Once their bank gets the instructions related to this arrangement, it becomes very easy to get paid. 

How does direct debit payment system work?

The process of setting up direct debit payment systems starts by getting authorization from your customer to pull funds from their account.

Once the customer approves the authorization request, you can set up a system for taking payments. It can be recurring payments with a set frequency.

Before taking out money from the customer’s account, you are supposed to send them a notice 10 working days prior to the transaction date. That notice must contain all important information clearly stated, like the amount, date of transaction, and frequency of the payment.

The requirement from the customer’s side is to ensure that they have enough money in their account to make the payment. 

The money transfer process can begin after the business owner sets up a Direct Debit for their customer. The amount being transacted and the amount given to the customer in the notice has to be the same.

The money would first go through some formalities from the customer’s account and then be transferred into the business’s account after approximately five working days. This is the case for the first transaction.

Once the payments get consistent, the processing time is reduced to three working days, on average. 

Benefits of direct debit payments for small businesses

1. Better cash flow

The absence of unpaid receipts and late payments is a golden scenario for any business. With the auto debit payment gateway, your business can be sure to get paid on time for the delivered products and services.

This means that your cash flow becomes healthy with a regular flow of income and this, in turn, strengthens the business’s working capital. All operations can be carried out smoothly, which ultimately creates a profitable business.

2. Faster payment settlements

With direct debit payments, all your payments can be completed faster than usual. Once you establish the terms of the payment cycle and rules for pulling funds from their account, there is nothing that can delay the process.

Other forms of payment usually take a lot of days to be processed and approved. As with the direct debit payment method, you have access to the customer’s account, there are no hurdles in the process — you just have to make sure to send the 10 working days' notice, well within time.

3. Increased sales

Direct debit payments can make your products or services more affordable for your customers. If you deliver high-value services, it can be difficult for your customers to pay a huge sum of money all at once.

Using the direct debit payment solution, you enable your customers to pay you smaller payment amounts at regular intervals.

This is beneficial for both parties, as the customer won’t have to discard a huge chunk of money from their account in one go, and your business will keep having a regular flow of income.

4. Time-saving

Using direct debit payment solutions can help you a lot of time. All those hours spent chasing down your customers to get payments are easily eliminated through automation.

Also, if you get an accounting integration along with the direct debit payment method, all your payments get automatically reconciled. This means you don’t have to manually spend time checking payments against bank statements.

5. Automatic payments for SaaS products

If you are a business that provides subscription-based or rental services, your work can become absolutely hassle-free with direct debit payments; as the payment method becomes automated, you don’t have to run behind your customer and send them repeated requests to make payments.

6. Better business forecasting

With an irregular inflow of income, making any business decisions or setting any future ventures for the company can be difficult because you never know when suddenly a customer might not pay, and you will be short of funds.

But with direct debit payment solutions, you can be sure of a stable and regular income for your business, using which you can make better forecasts and decisions.

How to set up a direct debit payment system?

1. Choose a direct debit provider

To choose a direct debit provider, you can take recommendations from other businesses which use this payment method or research on your own.

To save time and eliminate any hassle, it is best to choose a provider that can easily integrate with your accounting software for smooth reconciliation.

2. Invite your customers to pay you via direct debit

Once you set up a provider, the next step is to ask your customers to pay you using the direct debit payment method.

You can do this by first identifying those customers who are usually late in making payments and using bank transfers, cheques, or credit cards to make payments.

Focus your energy in convincing them. You can also include CTAs in your invoices saying “sign-up to make direct payments” or include an Instant Bank Pay link.

Remember to apply a timeline to this scheme by stating that customers using direct debit payments can enjoy numerous benefits. List those benefits and mention a deadline to create a sense of urgency.

3. Request payments from your customers

You can request either one-off or regular payments using the direct debit payment system. The tool you choose should give you the ability to schedule and plan payments, and it is best to have it integrated into your billing system.

Your customers must have advanced notice of the payments sent well within time so that they can make sure that their bank accounts have enough funds for you to withdraw as a payment. 

Related read: Best practices to manage your accounts receivables

Factors to consider when choosing a direct debit payment provider

While setting up the auto debit payment gateway, it is essential to choose a provider that is both reliable and highly efficient. This is because you want to pay as quickly as possible, without any loss, and yet it must not cost you a fortune to do so. When you choose a provider, look for:

1. Bank-to-bank specialist

Direct debit payments can also be made through credit or cards. But for most companies, it is easier to make a bank-to-bank transfer, as it is easier and cheaper, the rules don’t expire, and it is the most reliable way of money transfer.

2. A provider ensuring speed

The direct debit payments provider you choose must be able to onboard you quickly and also your customers so that the whole process of payments can start as soon as possible.

Usually, the sign-up should be free, and you should be able to take direct debit payments within minutes.

3. The one with a transparent fee structure

The whole purpose of installing a direct debit payment system is to get paid quickly and eliminate any extra fees like late payment fees.

Now, if your provider only starts charging extra costs or hidden charges, the grounds for choosing this method are defied. Hence, choose a provider which is transparent about their fee structure and has no extra costs attached to the plan.

4. Automation smart

The provider you choose is supposed to help you in automating the auto debit payment gateway and make your life easier.

The right provider would have a smart technology automated system that would flag any errors, catch any double entries, make reconciliation automatic and help you save numerous hours of the day.

5. Accounting software integration friendly

Direct debit payments are a smart solution for faster and safer payments for both the business and the customer. However, saving time on transactions and spending it on accounting reconciliation and billing systems is foolish.

So, choose a provider which can seamlessly integrate with your accounting software so that all the manual reconciliation gets eliminated and automatic reconciliation takes the lead.  

How much does direct debit payment system cost?

Direct debit payments cost can vary from provider to provider, this is why it is necessary to consider a few before setting up with any one provider. Be aware of any hidden or extra costs. 

Genuine and popular providers usually charge a 1% flat rate for smaller sums of money. So, it is better to get paid in smaller proportions to avoid any heavy transaction costs.

No provider must charge you a failed payment or dishonored payment cost. Your business is responsible for paying all the transaction fees, not your customer.

It shouldn’t be a burden because the benefits reaped from direct debit payments are much higher than these costs. 

Every business needs an uninterrupted way of getting paid and a way to maintain regular cash flow. Direct debit payments are one of the best solutions for saving time and money on being paid and keeping the cash flow positive.

Setting up an auto debit payment gateway ensures that you get paid on time for the products and services you have delivered, and in turn, this keeps your cash flow smooth.

Along with this, it is also secure because there is no manual handing over of cash or cheques. Plus, no extra fees, so it is a win-win situation for both the business and the customer. 

Just be careful while choosing a provider and send a well-drafted written notice to your customer in time so that you have the approval needed to pull funds.

In all, there are some formalities and things to take care of once your business gets used to it, and automating the system becomes easy. 

Interesting read: How to automate the bill pay process for your business?

What type of payment is direct debit?

Direct debit payments are those in which the business gets permission from the customer to pull funds as payments from the customer account. Once the system is set, the business needs to send a notice 10 working days before taking money from the customer’s account, stating the sum of money and frequency of payments. 

Is direct debit a monthly payment?

This decision is between the supplying business and the customer. Based on products and services provided and the terms and conditions agreed upon between them and the customer, the frequency and amount of payments are decided.

How do I stop a direct debit payment?

If you are a customer and want to stop the direct debit payment system, you need to write to your supplier that you are terminating the direct debit payment agreement. Along with this, you have to send instructions to your bank to remove the access given to the supplier and then monitor your accounts to check if the process was successful. 

Is direct debit the same as a bank transfer?

Direct debit payments are almost like bank transfers, as the money is shifted from the customer’s bank account to the supplying business’s bank account. The only difference is that the customer gives the supplying business access to pull funds after providing a notice; there is no need for the customer to start the payment process every time.

Do banks charge for direct debits?

Banks usually charge transaction fees that need to be paid by the supplying business and not the customer. 

How long do direct debit payments take?

Before pulling funds from the customer’s bank account, the business needs to provide a 10- business days notice to the customer, and then the transaction takes about 3 working days to complete.