Direct Debit and Standing Orders

More Cash Flow Tips: Get your Clients on Standing Orders

Good cash flow is imperative to businesses survival. One of the most common problems affecting cashflow is late or sporadic client payments.

The most effective way of avoiding this problem is by encouraging clients to make their payments by standing order or direct debit.

What are Standing Orders and Direct Debits?
A standing order is customers' instructions to their bank to pay a fixed sum of money to a named beneficiary on a regular basis for either a specified amount of time or until cancelled.

A direct debit requires the beneficiary to claim the money for the payment. The client must give their authority to enable you to proceed.

How are they set up?
Standing orders are set up by your client by instructing their bank to pay you the agreed amount of money on a regular basis, usually on a specific day of each month. These standing orders can be set up for a specific period of time or until otherwise notified by the client.

Direct debits, on the other hand, require you to obtain a completed direct debit mandate from your clients stating bank details, payment details and payment due dates. This signed confirmation of authority is then returned to the bank where it is processed by the BACS system.

Standing Orders or Direct Debit: which to choose?

Standing Orders
Standing orders are easy to set up with payments being sent directly into your bank account on a regular date, meaning no late payments. Because the client is responsible for setting up the standing order you save time and money.

However, as the standing order is organised by the client, this payment method can potentially become unreliable, should your client 'forget' to arrange payment. Also, should the amount payable change, this will need to be updated by the client, which again may be subjected to delays.

Direct Debits
Direct debits are set up by you, the beneficiary. As soon as a direct debit form has been completed and returned by the client, you can submit it to the bank for it to be set up. You will have the advantage of being able to claim the payments instead of waiting for them as well as claiming any new amounts that are due automatically once the client has been notified of the change.

On the down side, some banks may consider your business too small to justify making you an originator of direct debits. Also, as with standing orders, direct debits can be cancelled at anytime by the client. Most importantly, human error can occur, which may result in wrongful payments or no payments at all.

Why use Standing Orders/Direct Debits to Improve Cashflow?
Recent studies have shown that the use of standing orders and direct debit by consumers is on the rise. With internet access being more available, online banking is becoming increasingly popular, making standing orders and direct debits easier to set up, maintain and monitor.

The main benefit of requesting this payment method is that the right payments are made at the agreed times saving you money and time, eliminating the need for chasing payments each month if they are not forthcoming.

If the system is set up correctly, you can be sure to receive your payments without delay. By offering discounts to clients who pay via standing order or direct debit, you can potentially increase your cashflow, and by offering increased credit terms, you can help clients manage their payments more easily whilst at the same time boosting customer loyalty.

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