What is Direct Debit?
A direct debit is an instruction from a customer authorising a business to collect varying amounts from their bank account on agreed dates.
A direct debit is an automated payment method where the customer gives a business permission to collect money directly from their bank account. Unlike a standing order (which the payer controls), the payee initiates the collection.
How direct debits work: 1. The customer signs a Direct Debit Mandate (DDM) authorising your business to collect payments 2. You submit collection requests to your bank via Bacs (the UK's automated payment system) 3. Funds are collected from the customer's account on the specified date 4. The customer is protected by the Direct Debit Guarantee
The Direct Debit Guarantee: This is a key consumer protection. If a payment is collected in error (wrong amount or wrong date), the customer's bank must immediately refund the amount. This makes direct debits one of the safest payment methods for payers.
- **Advantages for businesses:**
- Predictable cash flow: — you know when payments will arrive
- Reduced chasing: — payments happen automatically
- Flexible amounts: — you can vary the amount each period (with advance notice)
- Lower admin: — no manual invoicing or payment reminders needed for recurring charges
Setting up direct debit collection: To collect direct debits, you need a Service User Number (SUN) from Bacs, or you can use a bureau or payment provider (like GoCardless) who hold a SUN on your behalf.
Direct debit vs standing order: With a direct debit, the business controls the amount and timing. With a standing order, the customer controls both. Direct debits are better for variable recurring payments; standing orders suit fixed regular amounts.
Examples
A SaaS company collects monthly subscriptions via direct debit, adjusting amounts when clients change plans
A gym sets up direct debits for membership fees, collecting on the 1st of each month
A utility company uses direct debit to collect variable energy bills quarterly
Related Terms
Standing Order
A standing order is a fixed, regular payment set up by the payer through their bank to automatically transfer a set amount to another account on a specified schedule.
Payment on Account
A payment on account is an advance payment made towards a future or existing liability, commonly referring to HMRC's system of collecting Self Assessment tax in two instalments.
Cash Flow
Cash flow is the movement of money into and out of a business over a given period, determining whether the business has enough cash to meet its obligations.
Net 30
Net 30 is a payment term meaning the full invoice amount is due within 30 days of the invoice date.