In any business, and especially those in start-up and early growth, cash flow is important. For companies that sell products and services requiring regular monthly payments, insisting your customers set-up a direct debit mandate with you seems like a good idea – and it is.
Usually at the start of the month you will send your customers a bill stating how much they owe you and at the end of the month you take that money directly from their bank, without them having to do anything. No more late payments or endless emails and phone calls chasing them. From your customer’s point of view they don’t have to worry about transferring money or writing cheques and they have plenty of time to query the bills before the money is taken. Even if they have a dispute after the money is taken The Direct Debit Guarantee entitles them to a full and immediate refund from their bank and they can cancel their mandate at any time. Seems like a perfect arrangement but there are a couple of things you as the supplier need to consider;
Direct Debit Guarantee
There is no limit on how far back your customer can claim their money back. We would expect that banks would query an indemnity claim from a customer of theirs if the payment was originally collected years ago as opposed to months, however the Direct Debit Guarantee heavily favours the customer and so it is simply the decision of the bank if they wish to query it. Within the SEPA Eurozone scheme, customers have a maximum of 13 months within which to file a claim with their bank. This means that you are vulnerable to malicious and spurious claims because if the bank agrees with their customer they will simply take the money back directly from your bank account. You are then left to pursue the debt by negotiating with the customer or through the courts. Whilst such instances are rare you should consider if Direct Debit is the best option where the amounts owed to you are large enough to financially damage your business if the worst happened. Many Direct Debit payment intermediaries have an upper monthly limit (usually around £5,000), mainly for this reason. Often they will increase this on a case-by-case basis but you should consider if you really want to do this regularly and if a system like BACS might be more appropriate for larger payments.
Refunds
Think carefully before you issue refunds on money that has been taken by Direct Debit. The process described by the Direct Debit Guarantee is that your customer makes the claim on their bank and the money is automatically taken from your bank account. Very often suppliers make the mistake of refunding money twice because they don’t realise that whatever they agree to refund their customer their bank will take the full amount for the periods disputed. Where the amounts involved are large this could severely damage your cash-flow.
Our very largest customers pay by BACS but for all other customers we insist that a Direct Debit mandate is signed before we will commence the process of delivering any order.
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