Note: This post is aimed at UK IT companies, but for any US IT companies reading then similar principles as Direct Debit apply using ACH – Automated Clearing House.
The flexible nature of Managed Services, where clients can expand or contract as needed is attractive to SMB clients who don’t want to be tied into a long term contract. For the IT company though, if a client’s monthly bill is changing from month to month, this can prove a challenge to accurately and efficiently invoice for.
Most IT companies choose to use a Standing Order instruction. Simply put, this allows a bank account holder to give instructions to their bank to pay a set amount at regular intervals to another’s account.
Standing Orders are free, simple to setup – but if the payment amount varies month to month, they can be a pain to maintain. A variation in the Managed Service contract – such as the addition or removal of a workstation – means the Standing Order needs to be modified. If the client neglects to update their Standing Order instruction with their bank – they either underpay you (leaving you to chase the shortfall), or overpay you (meaning you have to go to the admin chore of issuing a credit note or refund).
The flexibility of Direct Debit
When you start out into Managed Services, perhaps with a small number of clients who rarely grow or contract, Standing Order is fine. Once you start growing though, using Direct Debit is a better option to simplify Managed Service billing.
Most UK consumers are familiar with Direct Debit for paying household bills. Direct Debit allows businesses to transfer money on regular basis from consenting bank account holders. Unlike Standing Order, the amounts taken by Direct Debit can be flexible.
Isn’t Direct Debit only for big businesses?
Some SMB IT companies shy away from Direct Debit as they believe it is only a tool offered by banks to big businesses. While it’s true that many banks don’t offer Direct Debit facilities to small businesses looking to receive money from clients, there is a wide market of Direct Debit brokers who will offer this service to SMB’s at a small fee.
Such brokers will handle the administration of setting up and collecting Direct Debits payments from your clients for you.
Clients can typically sign-up to Direct Debit agreements with you on-line, and once per month (or at a schedule you determine) the broker will then debit the clients bank account for the cash amount you specify. This amount can vary, month to month, the payers will be notified of the amount to be taken from their bank account in advance. This flexible nature is what makes Direct Debit so useful for Managed Service Providers.
After taking payment, and notifying you of the results of the Direct Debit batch – the Direct Debit broker then typically holds the funds for 14 days (to protect against any claim backs from clients under the Direct Debit guarantee) before releasing it to your business bank account directly.
Direct Debit costs
For smaller transactions (think £1 to £5000) then GoCardless is a great service as a Direct Debit broker. It’s easy to setup and costs are a simple 1% of transactions. GoCardless integrates with most accounting packages to reduce admin and most of my MSP clients in the UK use this service, as do I.
For a larger number of regular transactions or regular transactions of larger values, then specialist Direct Debit brokers are worth their fees. Once you have set an account up with such a broker, you typically pay a monthly fee for the privilege of having an account. The Direct Debit broker my own MSP worked with charged us a flat rate of £35/month, for instance.
Cost wise, the Direct Debit broker my MSP worked with charged £3.50 per Direct Debit batch, plus £0.35 per transaction. So for a monthly batch of 50 Direct Debits, we’d pay £35 (the account fee) + £3.50 (the batch fee) + £17.50 (50 x £0.35 transaction fees) for a total of £56.
Compare that figure to the sheer hassle of trying to amend Standing Orders, issuing credit notes, chasing unpaid invoices and so on – and it looks a bargain.
If you’re an IT company or MSP who is still using Standing Orders or worse – issuing an invoice and waiting for payment – then I’d encourage you to implement Direct Debits. As your business grows, you’ll find it eliminates an awful lot of accounting headaches.