As the recession deepened, payment delays increased and SMEs now spend more time on credit control and managing cash flow.

The Faster Payments banking initiative offers real-time, provable bank transfers, putting pressure on organisations to use this approach to pay suppliers, and incur a £3-£4 per transaction fee.

With the cost of weekly and monthly payment cycles, cheque processing fees wrapped up in the overall bank charges, and Bankers’ Automated Clearing Services (BACS) fees, it has become very difficult to assess the true cost of payments.

When you add in Faster Payments, extended overdraft facilities where available, administrative costs associated with manual payment processes and finance staff dedicating more time to credit control, the business cost of making payments dramatically expands.

There is a pressing need for firms to address the rising costs of making payments and their associated processes.

One option is the use of commercial direct debits. These already account for the vast majority of consumer-to-business payment transactions. However, direct debits have yet to catch on among many businesses and organisations.

Since direct debits offer the payee huge advantages through guaranteed on-time payments and associated cash flow control, the resistance can only come from the payer community.

Yet direct debits also benefit the payer ­ notably in reducing the administrative process of preparing and making payments. When the payment is due, it is scheduled and happens automatically.

The cash is debited from the bank account at a set time as expected ­ unlike cheques, which can take days to arrive and are not always immediately cashed, putting further pressure on the cash flow management process.

Replacing traditional payment methods such as cheques with direct debits also reduces the risk of fraud, which is a growing concern in the economy.

Cheques being phased out
Furthermore, the banking industry and the Payment Council are expected to make it increasingly difficult and expensive to use cheques over the coming years in the build-up to phasing out cheques for business use by 2018. The early adoption
of direct debit ensures firms already have an alternative payment solution in place.

For the payer the transaction has no associated cost since the fee is paid by the direct debit originator. With guaranteed payments lined up, in-bound calls from creditors will significantly reduce, freeing up your finance team.

In the consumer marketplace, most organisations are actually charging more to those customers not paying with direct debits, to offset the additional credit control and administrative costs associated with cheques or over-the-counter cash.

While this approach is unlikely to be replicated in the business market in the short term, payer organisations can certainly take advantage of the guaranteed direct debit process to negotiate better payment terms ­ from percentage
discounts to extending the traditional 30 days to 45.

This approach eliminates the need to impose Late Payment of Commercial Debt Act penalties, which only put greater pressure on struggling organisations that are forced to devote more ­ and often senior staff ­ resources to credit control.

With guaranteed payments, better relationships can be developed between payer and payee and settlements negotiated that are more favourable to both.

SME struggles
According to recent research by BACS Payments Schemes, UK SMEs are now owed about £30.4bn.

This is a direct result of an overdue payments blow-out of about 40 per cent in the past year. And that figure is up from £18.6bn in the previous 12-month period.

The impact of this late-payment trend may increase, with organisations forced to delay payments as they wait for key debts to be paid. This must contribute to the downfall of firms, as cash flow escapes their control and the costs of managing credit escalate.

Direct debit is a guaranteed route to payment that ensures better cash flow visibility and management and slashes the cost of supplier payments. It may also ease the renegotiation of payment terms ­ adding value and creating a domino effect for more timely payments to be made across the board.

Georgia Leybourne is sales and marketing director at Albany Software