Standing orders and direct debit are two payment methods that allow businesses to automatically take regular payments from customers. They can both help growing companies collect revenue more efficiently than the traditional method of sending invoices.
"Pitched against manual invoicing, the difference is stark," says Dave Carr, transformational director at Access PaySuite. "Instead of filling out an invoice, sending it off, and waiting for a response, both standing orders and direct debit automatically take the owed amount."
This automation means that both standing orders and direct debits can also give businesses more control over their cash flow, adds Carr, by making it easier to ensure they receive regular payments on time.
What is a standing order?
A standing order is a regular payment of a fixed amount of money, paid out on a set date. For example, to pay rent or a key supplier.
How do standing orders work?
A standing order is set up by an individual or business, to pay another individual or business. It is created by the party paying for the products or services with their bank. The payer chooses the amount and the frequency of the payments and instructs their bank to send the funds to the seller.
How much do standing orders cost?
Sending and receiving payments by standing order doesn't cost anything. Once the standing order has been created, the payment is collected automatically with no additional costs. That said, standing orders can be heavy on administration for businesses being paid in this way, particularly at higher volumes. This is because you will need to monitor whether payments have been made and, if any changes need to be made - such as the amount or payment date - you will need to contact your customer to make those changes.
What is direct debit?
Direct debit is a regular payment of a fixed or variable amount, paid out on a specified date that can also be changed.
How do direct debits work?
Direct debit payments are initiated by businesses selling products or services. To set up a direct debit, a business will provide its customers with a form to populate their bank details. This form is known as a Direct Debit Mandate (DDM) and once complete, is submitted to the banks. The DDM allows a business to instruct its customer's bank on how much is owed and when. By using this payment method, your company is authorised to make changes to the amount or date without relying on the customer.
How much does direct debit cost my business?
Most companies use an off-the-shelf direct debit service provider to manage the paperwork around direct debit payments. This means there is an initial set-up cost to implementing the payments, followed by an ongoing transaction fee.
The cost of getting up and running with a service provider is 'relatively low,' says Daniel Corby, director at Altitude Internet Digital Marketing Services. "We were up and running for about £500," he says. Most providers then charge a cost per transaction and a small percentage of the transaction as an ongoing fee, he adds.
Standing order vs direct debit
Direct debits are automatic, recurring payments authorised by an account holder to allow a third party, typically a business or organisation, to withdraw funds from their bank account on specific dates for agreed-upon amounts.
A key difference between standing orders and direct debits is who controls the payments. With standing orders, customers have control over payments, relying on them to set up or modify orders. Manual checks are necessary, leading to potential delays in identifying failed payments, thereby increasing the risk of late payments and cash flow issues.
"Standing orders are difficult to administer even when you just have tens of customers," adds Carr. "They are also only valid for a fixed amount and therefore have limited use."
Direct debits, on the other hand, put the business in control of the payments. They also generate automated notifications if a payment fails. This makes direct debits a far more reliable payment method for predicting cash flow.
However, Carr adds that because direct debits put businesses in control, they require "a degree of trust" from customers, especially when large amounts of money are involved. "Due to this, in some cases, it may take a bit more customer relationship work to get these finalised, whereas a standing order puts all the responsibility in the customer's hands," he says.
Standing order vs business charge cards
Standing orders may be suited to new businesses or startups that are making smaller payments. But for established companies, like consultancies or agencies, that typically manage larger, one-time payments, charge cards offer a valuable alternative.
Charge cards typically don't carry pre-set spending limits, removing the worry of making regular, larger payments.
Moreover, charge cards also allow business owners to benefit from longer payment terms. For example, the American Express® Business Gold Card gives you up to 54 days to clear your Card balance, meaning you can keep your money in the account for longer and get more flexibility in your cash flow¹.
Many charge cards also offer reward programs on top of your regular card benefits. Exclusively with Amex®, you’ll earn 1 Membership Rewards® point on every full and eligible £1 spent. Points can be used towards business travel, employee perks or redeemed as a statement credit to reinvest in your business².
Other payment methods for businesses
Alongside direct debit and standing orders, other forms of electronic payments used in business include BACS and CHAPS transfers. Each is suited to different types of payments: BACS is typically used for regular payments in the UK; it is low-cost but relatively slow, with payments taking up to three working days to process. If your business relies on payments up front to help fund the production of goods, for example, an over-reliance on BACS could seriously hurt your cash flow.
CHAPS, on the other hand, tends to be used for large, one-off, and international payments. They are same-day payments that run 24/7, even on bank holidays and weekends. However, at around £20 per transaction, CHAPS is an expensive option³.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full and eligible £1 spent and charged, per transaction. Terms and conditions apply.
3. The information provided in this article is for informational purposes only and does not constitute financial advice. Always consult a qualified professional before making financial decisions. We are not liable for any actions taken based on this information.
