There always seems to be some confusion between standing order and direct debit, with some landlords and tenants using the term interchangeably. In this article, we will explore the differences between standing order and direct debit and the pros and cons of each for landlords.
The majority of rent payments are set up by tenants as a four-weekly or monthly standing order. The trouble with this, of course, is that the tenant is able to pause, skip, or even put a complete stop to the standing order payments causing trouble to the landlord.
Unless you have come to an understanding with your tenant based on their financial circumstances, there is no reason why your tenant shouldn’t be able to set up a regular payment plan with you. Either via direct debit or, more commonly, standing order. As part of their tenancy agreement, they should be able to pay the agreed rent amount each month, or else they shouldn’t live there. There is no reason why your tenant should be having to remember to pay manually each month. This only opens the situation up for accidental non-payments, and you may have to chase them up for it when they’re late.
What’s the difference between Direct Debit and Standing Order?
Direct debit and standing order are the two most common methods of automatically collecting regular payments.
The difference between standing order and direct debit is that with standing order, it is the tenant’s responsibility to set up the payment plan. With direct debit, the landlord is the one responsible for deducting the agreed rent payments each month.
With standing order, it is your tenant who gives instruction to their bank to pay you a fixed amount at the agreed frequency. This may be weekly, bi-weekly, four-weekly, monthly or even annually. The tenant has control over the payments but, on the other hand, as the tenant is in control of the payments, they are considered final in the eyes of the bank. It’s not so easy to get a refund if you pay incorrectly.
But, consider your tenants’ other bills: energy bills, phone bills, broadband bills, water bills, utility bills… In most cases, these will be collected by the suppliers via direct debit.
One of the reasons for many bills preferring direct debit over standing order is that these billed amounts tend to be variable based on your usage, rather than a fixed amount each month.
Direct debit puts the landlord in control, granting you more flexibility with variable payment amounts and payment frequency. Your tenant authorises you to collect the owed amount directly from their bank account.
Should landlords be collecting rent via Direct Debit?
Now that many private landlords have set up companies for their buy-to-let activities, collecting rent via direct debit is much easier.
Direct debit also allows the landlord to be notified should the rent payment fail. Checking your bank account each month for the rent payments can be unnecessarily time-consuming. You’ll also be notified if your tenant cancels their direct debit authorisation, so that you can contact them straight away in advance if there’s a possibility that they are expecting to be late on their next payment. In all, the administrative burden of rent collection is reduced.
If you already have a transparent agreement in place with your tenants, stating that there may be annual rent increases or irregular service charges, then direct debit also allows you to increase the payment amount without having to ask your tenants to manually update through their bank.
But are tenants even willing to give their landlords a direct debit mandate? What’s the benefit to them?
Direct debit enables your tenant to challenge a payment made and have the amount refunded by the bank, due to the Direct Debit Guarantee, should they disagree with the amount withdrawn. This gives the tenant some protection, in this regard. It also means that they won’t have to set up the payments, or update them in future.
If you’re a private landlord with just one or two properties, then direct debit may be a bit excessive. Standing order gets the job done with little administration needed to ensure the regular rent collections, and there are no additional fees involved. If you have a close relationship with your tenants, and consider them to be trustworthy, then there is absolutely nothing wrong with them paying rent by standing order.
However, if you are a buy-to-let landlord with an extensive portfolio and a large number of tenants, then you may want to consider collecting via direct debit. It can take a lot of the stress out of being a buy-to-let landlord.
To give you peace of mind, we also recommend Rent Guarantee Insurance.