SMALL BUSINESS RESOURCES

What is direct debit?

3 min read

What does direct debit mean? Why should you consider this type of payment collection for your NZ small business?

Direct debit refers to the practice of taking credit card or bank account details from a customer and setting up a recurring and automated payment schedule. 

The agreed payment will be set to repeat on a pre-arranged timeline – usually monthly or weekly.

Benefits of direct debit

If you run a business with a model that lends itself to regular payments, particularly with set pricing, you may wish to consider the benefits of offering this type of payment solution.

What kinds of businesses would benefit most from direct debit?

  • gyms or fitness classes
  • sport clubs or facilities
  • legal services or business advisors
  • health services such as massage or physiotherapy
  • subscription services of any kind
  • software
  • home delivery such as food or produce
  • childcare
  • rental services 
  • freelance and general contractors

One of the most obvious benefits of direct debit is surety of payment. 

You can depend on being paid a set amount for your products or services at regular intervals. This not only ensures you receive immediate compensation for work completed or goods provided, but it also helps you forecast cashflow better.

Another advantage to direct debit is that of ‘inertia’. You remove the constant decision-making process and instead the customer will have to make a conscious choice to stop services.

Invoicing vs direct debit

If your business model is one which would regularly invoice a bill to clients, you may find that direct debit is a much more suitable method. 

The drawbacks of invoicing:

  • you’ll have to send out each invoice individually
  • you’ll need to wait lengthy periods of time for your client to arrange payment
  • you may need to chase unpaid invoices repeatedly
  • you run the risk of ‘bad debts’ and unpaid work
  • you’ll have higher administrative and reporting burdens

Direct debit solves all these issues. You never have to wait for payment or have to undertake manual processes.

What is a variable direct debit?

While set pricing and regularity lend themselves perfectly to direct debit payment collection, many overlook how versatile direct debit can be.

With variable direct debit, you gain authorisation from your customer to debit variable amounts depending on what was used by the client or delivered by your business.

Think about your phone or electricity bill – while the monthly amount you’re charged for can vary, you don’t have to authorise every payment.

Difference between direct debit and automatic payment

What are the differences between direct debit and automatic payment? These two terms essentially refer to the same practice but from different perspectives. 

While direct debit is initiated by the business receiving payment, an automatic payment is a recurring expense set up and controlled by the individual or customer through their own bank account.

How to set up direct debit

There are two primary options when setting up direct debit for your small business.

  1. You can set it up and manage it yourself through your bank.
  2. While you can manage the entire process yourself, there are also a range of dedicated direct debit providers in New Zealand who will manage the direct debit process on your behalf. 

Manage direct debits directly from your invoicing software

The most efficient way to manage a direct debit service is by linking it with your accounting or invoicing software. This allows to you record and report on your cashflow and manage compliance tasks such as GST, while keeping your business finances and bank feeds under one roof.

Hopefully you now have a better understanding of what direct debit is, the benefits of direct debit and ways to go about it. You should now be able to make a clear decision on whether or not direct debit is a suitable payment solution for your small business.