Is Collecting Payment by Direct Debit Viable for Small Businesses?

[cref credit-chasing As previously explained], at The Tapas Lunch Company, we are sick of chasing customers for payment. Most of our trade customers are bars, pubs, delis and restaurants who are not exactly forthcoming with the cash and we spend too much time trying to get it out of them. So, we are thinking of turning to Direct Debit to solve our credit chasing problems. After having investigated this over the last couple of days, I’m happy to say that it does look viable, even for a tiny business like us. Here’s a summary of what I’ve found and the potential costs involved.

The Brief

We want to use Direct Debit to collect payment for invoices for goods delivered to our trade customers who typically order a variable amount once or twice a month. As a working estimate, I’m quoting 40 transactions a month.

The Options

The ins and outs of accepting Direct Debit can be horrendously complicated, but come down to this: you can either set up your own facility to accept DDs (called a SUN, like a credit card merchant account), or you can use a ‘bureau’ service which will effectively give you access to one of theirs. Of course, that’s a real simplification of how it works, but whether you can get your own SUN is the first important distinction to make.

I spoke to our bank and it was immediately obvious that we wouldn’t be able to get one – we’re just not big enough. Apparently, only customers with a turnover of £1 million can apply for a SUN – and that’s not us. I guess I could have called around other banks, but something told me I’d just be wasting my time, so I decided that using a bureau SUN was the way to go.

For the record, this excluded Accountis, who could help me with the software side of things if I had my own SUN. They would charge a £195 initial setup fee and £20 per month and 10p per transaction for use of the software. On top of that, I was advised that my bank would probably charge another 10p per transaction and £4-5 per billing cycle for file submission etc.

If you can get your own SUN, you might still need the services of a bureau to actually process the payments. From now on though, I’ll be referring to using a Bureau with a SUN that they either have or contract on your behalf – that’s the service that’s going to be of most interest to small businesses.

Costs to the Small Business of Running a Direct Debit Scheme using a Bureau Service plus Contracted SUN

Setup Costs

All the bureaus I spoke to charge a one-off setup fee. This ranged from £250 to £700, although the latter was immediately discounted by the salesperson to £500. In most cases, it appears this setup fee is to cover the cost of applying for a SUN number in your company’s name, which would cost at least £250 if you were dealing direct with the bank.

Something to consider is whether you will be getting unique use of a SUN or whether it will be shared with other companies. From what I was told, the former is preferable as you get paid quicker and your company name can appear on customers’ statements.

Per Customer Setup Fees

All Bureaus charged a one time fee to setup new customers on their systems. This ranged from 75p to £3.

Transaction Fees

Again, all Bureaus charge transaction fees for each direct debit collected. These ranged from 35p to 80p + 1.5%. Most bureaus appear to be using a flat-rate fee structure rather than percentage.

Ongoing or Billing Cycle Fees

There are certain costs involved in transmitting and receiving DD data to and from the banks that the bureau service will incur and look to pass on to you in some way. One bureau I spoke to charged a £30 per month maintenance fee. Another charged £38.45 based on a single monthly DD cycle. The cheapest I found was £3 per submission of the BACS file (a data format that the Bureau uses to communicate with the bank), so two cycles a month would cost only £6.

Other Charges

All the bureaus pass on a variety of other costs to the customer but my feeling is that these would be secondary, so I focused on the main collection costs. These fees are mainly in response to failed/bounced or cancelled transactions.

Procedures

Sending and Receiving Data

Another important point to consider is how a bureau deals with the data exchange between yourselves and them. Two of the companies I spoke to (eazycollect and iDirectDebit) provide a web interface which allows you to logon and submit payment details conveniently over the web. In our case, we needed to easily submit one-off billing amounts each month as our customer’s invoices are always different. The bureaus call this ‘ad-hoc’ Direct Debit payments, and you get the impression it is a little tricker than the normal way DDs work. Netbanx, for example, were unable to help us as their web interface doesn’t do ad-hoc payments. I also got the impression that organising ad-hoc payments through some of the other interfaces would be fiddly as they are set up mainly for recurring payments. eazycollect allowed me to demo their web interface and it had a dedicated page for submitting ad-hoc payments that looked like it would work well. eazypay use a datasheet which you fill out and email back to them for ad-hoc payments: they seemed to know what they were talking about and repeatedly assured me that this system was designed for ad-hoc payments.

Receiving the Money into Your Bank Account

The other issue of interest is the timescale for actually getting the cleared cash into your bank account. Suffice to say that this, again, varies from bureau to bureau. Some take as long as 15 days, eazypay quote 3-5; it looks to depend on whether you are using a unique SUN or not.

Summary of Quotes Received from Bureaus

That’s a very rough summary of the main costs I was quoted by each company. Bear in mind that each offers different services and setups, meaning that the cheapest here may not be the best for your business. Based on our requirement of 40 transactions a month and easy processing of ad-hoc payment, we’re going to try eazypay. I’ll let you know how we get on.