What are the benefits of Direct Debit payments for account receivables?

When it comes to managing your business's finances, accounts receivables (AR) play a crucial role in ensuring your company's financial stability. One of the most common and effective methods of collecting payments is through Direct Debit payments. In this blog post, we will explore the benefits and drawbacks of Direct Debit payments and whether they can improve your accounts receivables.

What are Direct Debit payments? 

Direct Debit payments are a type of automated payment method where the customer authorises a business to debit a pre-agreed amount from their bank account on a regular basis. This method is commonly used for recurring payments such as monthly bills or subscription services. Direct Debit payments eliminate the need for manual invoicing and reminders, which can improve cash flow and reduce the burden on accounts receivables staff. The popularity of Direct Debit (and it’s benefits) is only on the rise. 

• According to the UK Payments Council, Direct Debit payments accounted for 9.1 billion payments in 2019, making it the most popular payment method in the UK. 
• The same report found that the total value of Direct Debit payments in the UK was £1.3 trillion in 2019, a 3.3% increase from the previous year. 
• The same report found that businesses using Direct Debit payments also have an average reduction in late payments of 76%. 

Benefits of Direct Debit payments for accounts receivables 

Improved cash flow 

One of the primary benefits of Direct Debit payments is the improvement in cash flow for your business. They can reduce the amount of time it takes to receive payment from customers, as the funds are automatically transferred into your account on the agreed date. This can be particularly helpful for small businesses that rely on regular cash flow to maintain their operations. 

Reduced administrative burden 

Direct Debit payments can also help to reduce the administrative burden on your accounts receivables team. With Direct Debit payments, there is no need to manually invoice customers or chase payments, as the process is automated. This can free up your team to focus on other tasks and improve efficiency within your business. 

Improved customer retention 

Offering Direct Debit payments as an option can also improve customer retention. Customers are more likely to remain with a business that offers convenient payment options that fit their needs. Direct Debit payments can be particularly useful for subscription-based services, where customers are likely to stay with a business for an extended period. 

Drawbacks of Direct Debit payments for accounts receivables 

Higher risk of chargebacks 

One of the primary drawbacks of Direct Debit payments is the increased risk of chargebacks. Chargebacks occur when a customer disputes a payment and requests a refund. This can be particularly challenging for businesses that rely on Direct Debit payments for regular cash flow, as chargebacks can result in delayed payments or a loss of revenue. 

Potential for errors 

Direct Debit payments can also have a higher potential for errors, particularly if the payment information is incorrect or outdated. This can result in failed payments or charges being applied to the wrong account. It's important to ensure that your business has appropriate measures in place to verify payment information and prevent errors. 

Potential for fraud 

Direct Debit payments can also be vulnerable to fraud, particularly if payment information is stolen or compromised. It's important to have appropriate security measures in place to protect payment information and reduce the risk of fraud. 

How to minimise the drawbacks of Direct Debit payments 

When it comes to managing accounts receivables, it's important to have accurate and up-to-date information on the status of payments. One way to ensure this is to work with a payment provider that has good reporting capabilities to notify you of any missed payments. Here are a few reasons why this is important: 

• Improved cash flow management: If you don't receive timely notification of a missed payment, you may not be able to take the necessary actions to recover the funds owed to you. This can impact your cash flow and may lead to financial difficulties for your business. With good reporting, you can quickly identify any missed payments and take appropriate action to resolve the issue. 
• Better customer relations: If a customer misses a payment, it's important to reach out to them in a timely and professional manner to resolve the issue. By receiving timely notification of missed payments, you can reach out to the customer and work with them to find a solution. This can help to improve customer relations and prevent future missed payments. 
• Reduced administrative burden: Without good reporting, your accounts receivables team may need to spend a significant amount of time tracking down missed payments and following up with customers. This can be a time-consuming and inefficient process. By working with a payment provider that offers good reporting capabilities, you can reduce the administrative burden on your team and free up their time for other tasks. 
• Improved financial forecasting: By having accurate and up-to-date information on the status of payments, you can improve your financial forecasting and make more informed business decisions. This can be particularly important for small businesses that rely on regular cash flow to maintain their operations. 

Good reporting capabilities from your payment provider can help you to improve your accounts receivables management by providing timely and accurate information on the status of payments. This can improve your cash flow management, customer relations, reduce administrative burden, and improve financial forecasting. It's important to consider these factors when choosing a payment provider and to ensure that their reporting capabilities meet the needs of your business. 

Conclusion 

Before implementing Direct Debit payments, it's important to weigh the pros and cons and determine whether this payment method is right for your business. If you do decide to offer Direct Debit payments, it's important to have appropriate security measures in place to protect payment information and reduce the risk of fraud. By carefully considering the benefits and drawbacks, you can make an informed decision about whether this payment method will improve your accounts receivables.