The main differences

– A standing order is an instruction a customer gives to his bank, to pay a fixed amount on set dates to the bank account of a named beneficiary. The customer can set up, change and cancel standing orders.

– A direct debit allows someone else (usually a company, known as the ‘orginator’) to take money from a customer’s account at either a fixed or variable amount and at agreed intervals.

– The originator has to be properly authorised under the direct debit scheme before it can claim money in this way.

– The customer is protected under the Direct Debit Guarantee Scheme, which means that any amounts wrongly debited are refunded straight away.

According to Paul Logan, product manager for Lloyds TSB Business Banking, to have your company registered as an originator can take up to 10 days, as your bank will run certain checks.

“If, as a company, you want to gain access to people’s accounts, you have to register with a system called BACS Ltd, and to do this you will need to be sponsored by a bank. This can be a slight barrier to someone starting up in business, but we are quite flexible and as long as the person has a good track record, there shouldn’t be a problem,” explains Logan.

As Nigel Lander, a specialist finance adviser for Business Link for London points out, although the bank is not lending you money, you are taking money from people’s accounts and the bank will need to go through a process to establish your track record.

Customer control

Standing orders give more control to the customer as the amount of money taken out and the date this happens is fixed, and often there is a maturity date when the agreement will need to be renewed by both parties. If you want to change any part of the agreement, you will need to inform the customer. A direct debit can be ongoing, and the originator can vary at any time the amount that is debited and the time it is taken out of the account.

“Some people can be nervous about money being taken from their accounts via a direct debit. But with direct debits, banks operate very embedded systems, with agreements and contracts in place. If any amount is taken out in error, the bank will meet the liability,” explains Lander.

Business benefits of a direct debit system

The advantage of having a direct debit system in place is that it can help maintain your cashflow, as money can be debited from your customer’s account and credited to your account on the same day. Direct debiting can also offer peace of mind to both you and your customer, as the process leaves a full audit trail that can be accessed if necessary, for example, if there are any queries.

It can also be quicker to set up a direct debit system rather than a standing order. If the amounts you charge your customers are likely to fluctuate on a regular basis, a direct debit will allow you to collect adjusted payments automatically as the amount you debit is not fixed. If you use standing orders, you will need to contact the customer and gain their consent each time you choose to change the amount being paid, which can be a time-consuming process.

“If you can’t set up a direct debit system, you should look at two things: your ability to take credit card payments and standing orders. But remember that however hard you try, the money can come in at any time throughout a monthly period, and it’s always better to get the money at one time. If you are an established business, a direct debit system is better, ” advises Lander.

See also: Poor direct debit practice is leading to loss of customer trust