Last editedMar 20222 min read
If your regular clients pay you by bank transfer, cheque or cash, you’ll know the admin headaches caused by manually processing, chasing and reconciling payments.
These time consuming tasks are costing the average small business 4 hours a week in payments admin and make it harder to track who has paid on time and (more importantly) who hasn’t (on average, professional services companies in the UK are owed 54k in outstanding payments).
The good news is, though these tasks are important, they don’t have to be time consuming – there are options open to you to automate cash collection for your regular clients. Put one of these in place and you’ll boost your business’ cash flow, reduce overdue invoices and claim back the time you spend processing payments manually.
In this post, we compare three automated payment methods, and identify the pros and cons of each, to help you choose the right one for your business:
1. Standing order
A standing order is an instruction from your client to their bank to pay your business a fixed amount at regular intervals – it’s a payment schedule.
Standing orders work by ‘pushing’ predefined funds from the client's account to your business bank account, using the usual banking system.
Businesses that use standing orders include those that have regular monthly payments, with unchanging fees e.g. fitness instructors, membership clubs or landlords/letting agents.
|Automates regular payments and boosts cash flow (once set up)||You rely on the customer to set up the payments|
|Free of charge for you and your customer||No payment notifications: you won’t know when a payment has been received or if payments are late until you check your bank account|
|Quick for the customer to set up via online banking||You can’t change the amount, date or frequency of payment|
|Payments appear in your account the same day using Faster Payments|
2. Direct Debits
With Direct Debit, your customer authorises you to take funds from their bank account whenever payment is due. The Direct Debit system (run by Bacs in the UK) ‘pulls’ funds from your customer’s account, into yours.
Direct Debit is used by business services agencies and utilities providers to collect payment against invoices (for fixed or variable amounts), as well as by subscription and membership businesses, and businesses taking instalment payments.
|Automates regular payments and boosts cash flow||Requires your customer to fill out a Direct Debit mandate before payment can be taken (this can be done online through GoCardless)|
|Extremely flexible: easily change payment amounts and dates||Funds take 3-5 days to appear in your account|
|Once set up, needs minimal administration||Cost implication of using the Direct Debit system (although this can be as small as a 1% charge on the transaction with GoCardless)|
|Can be integrated into your existing accounting and billing software. For example Xero, QuickBooks and Sage (when using GoCardless), allowing you to automatically reconcile invoices with your accounts|
|Safe and secure – consumers are protected by the Direct Debit Guarantee|
3. Automated cards payments
Also known as continuous payment authorities (CPAs) and ‘recurring card payments’, automated card payments use the card details saved in your finance system to take regular payments from customers at pre-agreed times.
They’re generally used for recurring payments where speed of payment is a priority. Businesses that use automated card payments include gyms, internet service providers and payday loan companies.
|Automates regular payments and boosts cash flow||Cost per transaction is high, when compared to standing order or Direct Debit – typically >3%|
|Convenient for customers – they simply share card details and authorise a CPA||High payment failure rates (e.g. because of cards expiring or credit limits being reached) - typically 5-15% compared to less than 1% for Direct Debit|
|Simple for your business to set up||Admin time higher than Direct Debit due to increased payment failures|
|Fast: best used if you require next-day payment|
|Good for taking automated payments from customers outside EU and Australia|
So, which option should you go for?
That depends on what’s important to your business. If you’re looking for something free, if your monthly fees don’t change and you don’t mind manually reconciling payments, standing orders are a good option.
If you want more visibility into payments and the control to change dates and amounts then Direct Debit or automated card payments are best. Plus, both these solutions can be plugged into your existing accounting and billing software, allowing you to automatically reconcile your payments.
If you want to keep transaction fees low and avoid issues with lost or expired cards, then Direct Debit might be the right option for you.
For more information before making the decision, try our guide to standing order vs Direct Debit.