Dummies guide to Direct Debit for small businesses

Get paid on time, every time.

Cash flow is vital for small companies, with 60% of small to medium enterprises blaming late payments for serious cash-flow problems. Having the tools in place to collect payments can be vital for survival.

This episode on the payments podcast is our third episode with Andrew Strickland, an accredited Bacs trainer with over 10 years' experience in Direct Debit training.

In this episode, we focus on why small companies should love Direct Debits, the collection myths and how companies can take that first step towards collecting Direct Debits.

Podcast Transcript

Fiona:  How often is the business you own, or work for, paid late for regular ongoing payments? Cash flow can be key to the survival of a business, so ensuring you have processes in place which can help manage this is crucial. This episode will go over why, exactly, direct debits can be vital to your collection process, and how it can help keep your customers happy.

I’m Fiona McCarron, the host of this Payments Podcast. This episode is part three of a series of three podcasts on direct debits. In this episode, we’ll be focusing on how businesses are able to set up direct debits and use this to their advantage. With me today is Andrew Strickland who delivers Bacs accredited direct debit training and has worked with direct debits for 10 years.

Hi Andrew.

Andrew: Hi Fiona.

Fiona: Andrew, tell us, why do companies love direct debits?

Andrew: I suppose it’s probably summed up by saying that direct debits give companies a degree of control. You have control over the timing of collections, not having to wait for someone to send you money. Under direct debit, they’ve given you authority to access their bank account. Once you’ve set up that instruction on their bank account, then it’s simply a case of sending a request through to their bank. The money is debited from their account and credited to you.

You also control how much you receive. That, in turn, might have an impact on the amount of debt that your company carries. As well as that, direct debit can be relatively cheap when compared to other methods of collection. Although this might be affected by volumes and values of the collections that you’re making.

Fiona: Andrew, tell me, what are the common myths businesses have regarding direct debits?

Andrew: I suppose that, on the face of it, it may appear complicated, with lots of rules and mandatory processes. The services user guide and rules to the direct debit scheme is currently 171 pages long. There is plenty of support. For instance, there is the Bacs help desk themselves. Your sponsor bank will be able to help you. There is modern direct debit management software which can help to automate processes, which can also help to keep you compliant.

Something else, though, that some organisations can have concerns about revolves around risk and liability. This will depend on the type of service user that you are. It is a fact that, under the direct debit guarantee, someone can claim back money. They have the right to a refund.

It’s worth pointing out that there is a very low percentage of collections that are actually refunded. It’s nowhere near on the scale of credit card chargebacks. In addition, the vast majority of refunds are actually where there have been genuine errors. The payer is entitled to a refund. Very few refunds, a very minute percentage, are actually spurious. Even less of those involve multiple collections going back any period of time. Organisations don’t really have a real, valid, cause for concern around that.

Fiona: Andrew, I’m sure there are many advantages to using the direct debit scheme for collections. Could you go through some of those with us?

Andrew: For instance, we mentioned a moment ago, reduced processing costs or admin costs. The cost for submitting files to Bacs will be dictated by a company’s bank. Generally, the way that it works is that they will charge you an amount for submitting a file or a batch and then a few pence for each item within that batch. If you’re doing large volumes this can work out quite cheap when compared to credit cards which, for instance, might be a 2% or a 3% charge. Also, the cost of processing cheques. All these things are more expensive, generally, if you’re sending of files through Bacs that are substantial volumes or large value.

There are also less errors in terms of the amount of money that is credited to your bank account, because you’re in control of how much you’re asking for. You’re not dependent on somebody completing a cheque correctly or sending the right amount through standing order. That leads to better service quality.

In addition, some companies find that direct debit enables them to retain customers. A classic example is insurance companies where, for instance, they obtain authority to debit someone’s bank account. Then, at the end of the year, they want them to renew their insurance. Generally, they’ll find that people are more likely just to roll over and continue with that company for a second, third, or fourth year simply because they’ve already got the direct debit set up.

Some companies will say that, because they offer direct debit, that leads to an increased take up of their services because it says something about your company.

A major benefit of direct debit over something like standing order is that, although it can be used for recurring fixed amounts such as for membership or insurance, it can also be used for variable collections. When someone signs an authority, it’s a variable authority. That enables a service user to take different amounts on different dates. That has benefits for companies that may be suppliers that invoice companies or other individuals, they can just take whatever is on the invoice.

Of course, as we mentioned at the outset, the real benefit is that it gives you control over your income. Rather than somebody’s bank pushing the money through to the service user, the service user is pulling the money through. That has improved cash flow benefits.

Fiona: Andrew, do you have any examples you could share with us?

Andrew: Just take that last point, it’s estimated that 60% of SME’s with serious cash flow problems blame late payments. I was reading, just this week, an example of a large coffee company who said that their invoices were being paid up to four months late. Since using direct debit, their average payment term has dropped from 62 days down to 41 days. What they find is that, not only is money outstanding for less periods of time but in addition, it costs them less money to chase debt.

Fiona: What benefits and protection does it give to an organisation’s customers?

Andrew: I think most people would acknowledge that direct debit is an easy and convenient payment method. You don’t have to spend time writing out and sending cheques to people, or making arrangements through your bank. It’s very straightforward. Once it’s set up it can just continue. It also helps to ensure payments are made on time. Many people, particularly elderly people, worry about, for instance, services or utilities, making sure that their bills are paid on time. They don’t want to get into debt. Direct debit can ensure that is the case.

Because it enables a company to spread costs over a period of time… For instance, insurance premiums, most companies will allow you to pay on a monthly basis rather than having to pay an annual premium. It can help payers with regards to budgeting. Because of the benefits that are associated for companies, that we discussed a minute ago, actually what we find is that there are many organisations that actually offer discounts or incentives to payers if they pay by direct debit.

Of course, the fact is that direct debit is safe and reliable because of the direct debit guarantee and the safeguards that it offers to payers.

Continue listening: Guide to Direct Debit - Part 1: The how, what and why for businesses

Fiona: Who can collect with direct debits, Andrew, and what are the requirements?

Andrew: For a company to become a service user in its own right, that means they have their own service user number because they’ve been sponsored onto the scheme, they have to contact their bank. There are certain criteria that they have to adhere to. We have to remember that, becoming a service user under the scheme, you’re being given access to people’s bank accounts.

You have to be a legitimate business. The sponsoring bank will vet them to make sure that is the case. They will consider whether or not they are a bona fide business, they will look at their business model and see exactly what it is that they’re doing and how they’re doing it, they will ascertain risks associated with taking them on board, they will also look at processes that the service user intends to run with. For instance, how they’re going to verify whose bank details they’re being given.

If a company is granted service user status, the bank will then determine whether or not they’re going to be, what we call, a direct submitter… In other words, whether they’re going to submit files directly through the Bacs system or whether they’ll be an indirect submitter which means that they operate through a bureau. They transmit information to a bureau, who send the files off on their behalf.

A company who can’t get approval, or sponsorship, can still access the scheme. There is something called facilities management. This is where a service user, who is known as a facilities management provider, will collect on behalf of another company, a facilities management client. There are a number of companies who provide this service.

Fiona: Can you explain more, Andrew, about the timescales for processing direct debits?

Andrew: Everything that is done through the Bacs system takes a minimum of three working days. However, there are some other considerations. For instance, before collecting any money for the first time, obviously an organisation – a service user – has to obtain authority from the payer. That may take time, depending on the method that’s being used for capturing that authority.

The service user, before they can actually collect money from a bank account, has to go through a process that we call lodgement. This is simply the act of setting up the direct debit instruction or authority on the payer’s account. That can be done in one of two ways. Either by posting it to the bank or by sending it electronically, through something called the AUDDIS system. That will be dictated by what type of service user status a company is given by their sponsoring bank.

The other thing that has to be taken into account, in terms of the timescales for processing direct debits, is advanced notice. The payer has to be advised about how much is going to be debited from the bank account. The default time period for that is 10 working days, although that can be changed with the approval of the sponsor bank. Also, just to mention, if a company is collecting regular amounts on regular dates a schedule can be provided to that effect. In that instance, the service user wouldn’t have to give advanced notice every single time they’re making a collection because they’ve already outlined it in a schedule of future payments.

Fiona: How would a company, wanting to start to collect by direct debit, get the ball rolling?

Andrew: The first port of call should be your bank. Perhaps talk to your account manager or the Bacs liaison team. They’ll be able to give you an idea whether an application would be considered. If their answer is no, obviously, the thing to do would be to look up direct debit facilities management online, and you’ll be able to get a list of companies that can offer that facility for you.

Fiona: What would a business need to know to get this started?

Andrew: If you’re applying to your bank they should give you access to the service user guide and rules, which obviously will then give you an idea of how things work. You’ll need to give consideration, for instance, to the systems that you use for transmitting the files for direct debit. You’ll also need to think about whether or not that’s just going to be a simple transmission software or whether you want something a bit more sophisticated, with direct debit management facilities. Also, how those systems will integrate with your back office system for getting data in and out.

Of course, you’ll need to update staff with regard to changes in processes. They’ll need to know a bit about the knowledge around the scheme, the processes, and the rules. It would be good to think about some training at that point, just to give you the heads up as to how everything works.

You’ll also need to think about the impact that it might have on your current methods of collection and your current customers. What’s going to happen in terms of moving them from one method of payment to the other, if that’s what you want to do? That might impact customer-facing staff, for instance.

You’ll probably have to come up with some process maps and some procedural documentation, which probably means that someone within the organisation would need to own the project just so that they can understand the processes and see it through from start to finish.

Fiona: Thanks, Andrew, for that really useful insight into direct debit for businesses and how to get started.

This was the last episode in our three-part direct debit series. If you haven’t already, please check out our other two episodes. For more information regarding how direct debit can benefit your organisation, go to Bacs.co.uk, where you can find more information on Bacs accredited training providers and solution options.