Business AdviceTechnology

The Benefits of Pre-authorized Debits For Startups and Small Businesses

By October 6, 2020November 2nd, 2020No Comments

As a startup, you need money—a revelation we’re sure you’ve come to by now. How else are you supposed to pay your employees, grow your business, and afford your favourite coffee?

One of the best ways to keep your money where you need it is managing and lowering your expenses. In the early days, cash flow is tight, and ensuring you have enough money to pay the bills is your number one priority. We’re sure you know this already, but what you may not know is how much time and money pre-authorized debits can save you. 

Your first obvious choice for simplifying payments is allowing your customers to pay by credit card, but there are some downsides to this payment method. PADs, in essence, work the same way, but the funds are drawn from a client’s bank account instead of charging their credit card, which incurs high fees and limits.

Pre-authorized debits streamline the payment process and allow customers to pay your business without criminally-costly credit card fees. This simple change to your payment procedures will keep your hard-earned money in your pocket, and you’ll never need to chase down a payment again. Did we catch your attention?

Pre-Authorized Debits

Pre-authorized debits (PADs) are a handy way to make payments, pay bills, and receive payments automatically. Also known as pre-authorized chequing (PAC), pre-authorized payment (PAP), pre-authorized withdrawal, and direct debit, PADs give permission to a financial institution or company to debit a customer’s bank account when a payment is due instead of waiting for the customer to do it themselves. 

Yeah, you might not want to make changes to how you receive money, but hear us out.

As a startup, it means you never have to wait to receive payment on an invoice. When the invoice is due, you withdraw the funds from your client’s bank account without having to chase anyone down. For your customer, it means never having to write or post cheques or log into banking software. All they need to do is fill out their bank debit details at the start and watch their email to be notified when a payment will be withdrawn. No muss, no fuss.

The Benefits of Pre-Authorized Debits

Avoid Credit Card Fees

By far the most appealing benefit of pre-authorized payments is the money you save from credit card fees. Pre-authorized debits can save your business hundreds to thousands of dollars in fees, depending on the amount of money that flows in and out of your business (hopefully it’s lots!) This reason alone is enough to consider making the switch to PADs. Unless of course you like credit card fees. If that’s the case, well, we don’t really know what we can do for you.

Avoid Credit Card Limits

For customers who need to make larger transactions, credit cards might not work due to credit card limits. In these cases, payees may resort to sending cheques and wire payments if you haven’t set up PADs.

Avoid Receivables

Pre-authorized debits allow your business to avoid receivables altogether. They are automatically processed, so you’ll never have customers that owe your business money. Imagine that, right? The payment is withdrawn from your customer’s bank account as soon as it is due, instead of an I-owe-you approach that can put your cash flow off balance and have you pulling your hair out. 

No More Chasing Customers

Chasing customers is a waste of everyone’s time, and it takes a toll on your business, not to mention your mental health. When you chase a customer for a payment, you lose hold of your cash flow, which makes financial planning an exercise in futility. Pre-authorized payments initiate without waiting for your customer to act. They guarantee you get paid when you’re supposed to, even if your customer is busy, on vacation, or forgot to check their email.

Set Up Payment Schedules

Pre-authorized debits allow you to set up payment schedules for recurring invoices. A schedule adds consistency to your customer relationships, and it means you’re always paid on time. The recurring invoice is set up in Xero and Xero creates it automatically based on the schedule you set.

Schedules will also save you the time you usually spend on dry, monotonous tasks like creating invoices and requesting a payment each billing cycle. These tasks aren’t quite as bad as watching paint dry, but they’re not much better. Avoid them with PADs ?! 

Build Long-Term Client Relationships

Pre-authorized payments can illustrate your commitment to your customers. Think of it like a promise ring—it’s not like you would go to the effort of setting up pre-authorized payments and payment schedules for one-off purchases. They establish a long-term relationship based on trust and reliability, demonstrating that you value their business now and in the many months and (hopefully) years to come.

Approaching Clients About Pre-Authorized Debits

If there’s any downside to pre-authorized payments, it’s that you need to work with your clients to set them up. It may be tough to explain to an old-fashioned client why they should give your business access to their bank account. Once PADs are set up, payments are a breeze, but you do need to ensure you have procedures in place that make customers feel completely comfortable and secure.

Pushback From Customers

You may get pushback from customers who feel uneasy about the prospect of handing you the control to withdraw funds from their account, which is understandable. That’s why it’s up to you to give them all the facts they need to understand how pre-authorized debits work.

Most people are comfortable leaving their credit card anywhere and everywhere, but some are still reluctant when it comes to their bank account. It’s similar to how people felt in the early to mid-2000s when online credit card payments were on the rise. People are afraid the money in their account will be lost or stolen, when the procedure is actually quite secure.

PADs have strict rules that protect payees. In Canada, financial institutions established terms and conditions for the processing of PADs. Pre-authorized debits don’t mean you have free reign to withdraw whatever you want. The terms keep payees safe and ensure proper authorization and safeguards against improper withdrawals. 

Address Customer Concerns

Give your customers all of the information they need to feel comfortable with your payment procedures. They may not have set up PADs before, so it’s up to you to show them how it works and the security features in place. You may need to do a little hand-holding.

A notification is sent a few days before a withdrawal is made, so the customer knows exactly what to expect. If the payee prefers, they have the option to manually approve each payment before a withdrawal is made. This may help your client to understand they still have complete control over their money. 

Mandatory Pre-Authorized Debits

You may find you like PADs so much that you don’t want to go back to the old way of doing things, which makes sense, as it can be a great benefit to your business to set up each of your customers on PADs. That said, it’s much easier to do this right from the beginning than it is to transition older customers to a new payment method. 

Give your older customers some breathing room and space to adjust. They will need time to learn about your new process, and they will need to set aside a few minutes to fill out their bank debit details when the switch is made. 

If it’s taking longer than you want to transition customers over to PADs, you can set a future date that all customers need to make the switch by. At first, you can gently encourage customers to switch to PADs by outlining how the change will benefit you both. Down the line, you can choose a deadline that gives customers plenty of time to provide bank details.

Third-Party Payment Processors

Setting up PADs through your bank is a pain in the butt, and not every company, especially new businesses, are granted that feature. There’s also no seamless integration with Xero and no automatic collection of payments/reconciliation. That’s where third-party payment processors like GoCardless come in.

GoCardless 

In a word, GoCardless rocks. And no, we’re not getting paid to say that. They’re the largest international player in the third-party payment processor market. They simplify collecting recurring and one-off payments from customers across the globe through bank debit schemes like PAD in Canada. Using GoCardless to collect and manage recurring payments can save businesses up to 56% in operational costs. Plus, GoCardless integrates seamlessly with Xero, so you can automatically reconcile your invoices, saving hours of admin time that could be spent developing your next offering or just taking a break. And couldn’t we all use a little break? 

There’s a lot on the horizon for GoCardless that we’re pretty excited about. In the UK, Transferwise recently rolled out a bill payment feature that lets you pay suppliers through Xero using your bank account. This means no more logging into your bank to make expensive wire transfers or using third-party payment platforms. Expect features like this to be available to Canadian businesses in the future.

Bottom Line 

  • Pre-authorized debits can save your business hundreds to thousands of dollars in fees.
  • With pre-authorized debits, you ensure immediate payments from customers.
  • Establish a process for how you approach customers about pre-authorized payments and be prepared to answer their questions so they feel comfortable and secure.
  • GoCardless is a third-party payment processor that simplifies the collection of recurring and one-off payments through bank debit schemes, including PAD in Canada. 
  • The sooner you make the switch, the sooner you can save time, reduce headaches, and save your hard-earned money. 

Element CPA Can Help You Set Up Pre-Authorized Debits

Stop wasting time chasing customers for payments and stop wasting money on credit card fees. We can help your startup set up pre-authorized payments to streamline your payment procedures.

Contact Element CPA to learn more about the benefits of pre-authorized debits. Whether you’re at the Early Venture, Series A, or Growth Stage, we’ll give you the right tools at the right time to plan, budget, grow, scale, and smile about your finances!


About Element CPA

Element CPA is an innovative accounting partner that’s 100% focused on helping Canadian startups and small businesses get their books in order, operate more efficiently and plan for the future. We handle the day-to-day financial operations that make your business run, tell the story behind your numbers and provide advice as you grow.