Pros And Cons Of Direct Debit For Small Businesses

22nd September 2021

Many small businesses rely on a consistent cash flow to stay afloat - and missed payments or unreliable payment methods can be the downfall of any small business owner. 

Direct debit can be a useful way to collect funds from clients and customers - it’s quick and easy, and might be the perfect option if you’re a small business owner. 

But how much do you know about direct debits? Are they the same as standing orders? Are they reliable? If you’re considering using direct debits to collect payments, keep reading to learn the pros and cons.

What Is a Direct Debit?

A direct debit is essentially an instruction from a bank to retrieve funds. 

You may have direct debits set up taking funds from your bank for a variety of things -  your phone bill, utility bills, any charities you’re subscribed to, and other subscriptions may claim their funds from your bank using direct debit. 

It is an automated method of payment that allows companies to draw payments from bank accounts. Permission is required to set up the direct debit, and then companies will draw the funds from your account when needed. 

Regardless of the size of your business, direct debits are one of the most efficient ways for you to retrieve payments from clients and customers. 

If you offer payments in instalments for products or services, you offer subscription services, or you regularly receive invoices, then a direct debit can streamline the process. 

It will save you from waiting around for the client or customer to approve the transaction, as it is an automated process.

However, direct debits don’t clear automatically and can take three days for the transaction to clear and the money to appear in your bank account.

What About Standing Orders?

Many people get confused between standing orders and direct debits - but there is one key difference. 

A direct debit is an automated payment that is in the hands of the business. Once the customer has given permission, the business can retrieve how much they like and when they like.

However, if the business takes more than they should, the customer can easily dispute the payment with their bank. 

A standing order gives the customer more control - the customer sets up the standing order themselves, and sets a date and frequency in which the funds get sent.

It is essentially a regular payment and can be cancelled at any time, as long as it’s at least 48 hours before the payment is due.

Pros Of Using A Direct Debit

If you’re a small business, it can be very time consuming trying to collect funds from customers. A direct debit automates the process, making it quicker and easier to get the funds you’re owed. 

This gives you more control over the cash flow, and you won’t have to wait around for a client or customer to send you the money or approve the transaction. 

It can also save you time and energy when it comes to paperwork. Nobody enjoys paperwork, and the automated process of a direct debit reduces the amount of paperwork, giving you time to focus on other important aspects of your small business. 

Budgeting can be difficult for any small business, but using direct debits makes it easier, as you have a fixed schedule of payments and can work out in advance what you’ll be paid and when. 

You won’t have to worry about late payments - as the funds will automatically leave the customer's account as long as they have the funds in the account, and haven’t called the bank to cancel the direct debit. 

Another positive aspect of direct debits is that you aren’t limited to one payment a month - once the direct debit is authorised, you can collect payments at any time. 

Direct debits aren’t restricted to the UK either - SEPA (single euro payments area) allows you to collect payments from any of the SEPA countries and territories in Europe.

Cons Of Using A Direct Debit

Although direct debits are efficient and convenient, every process has its downsides. 

Direct debits don’t clear automatically - it can take three days for you to see the funds once the instruction has been given. 

It will take even longer if it’s a weekend or bank holiday, as direct debits only get paid on working days (Monday - Friday non-bank holidays). 

Customers can also dispute the payment, or cancel the payment on the day it is due to leave - and in many instances, the bank will side with the customer. 

You are also required to let the customer know how much you’ll be taking and when you’ll be collecting it - failing to do so can result in the customer requesting a chargeback.

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