How to set up direct debit for your small business

Published Monday 24 November 2025

Table of contents

• What is direct debit?
• Benefits of direct debit for small business
• Direct debit features that benefit small businesses
• How does direct debit work?
• How to set up direct debit
• Direct debit fees and costs
• Direct debit integration with accounting software
• How long does a direct debit take?
• Direct debit collection options
• What about direct debit indemnity?
• Direct debit services for small businesses
• Streamline your payments with direct debit and Xero
• FAQs on direct debit for small business

Key takeaways

• Implement direct debit to accelerate payment collection, as it processes payments almost instantly compared to traditional invoices that can take 30+ days to be paid.

• Choose a direct debit provider that integrates with your accounting software to automate reconciliation and eliminate manual data entry, saving approximately one full day per week on administrative tasks.

• Avoid using direct debit for high-value transactions due to indemnity rules that allow customers to dispute and receive refunds up to seven months after the transaction, even when disputes may be unreasonable.

• Set up automated payment notifications and recurring payment schedules through your provider to streamline the entire accounts receivable process while maintaining customer convenience.

What is direct debit?

Direct debit is an automated payment collection system where you collect payments straight from your customer's bank account. You notify them ahead of time about the amount and date. Once set up, payments happen automatically without any action from your customer.

Benefits of direct debit for small business

Direct debit offers three key advantages over traditional invoicing:

• : While invoices can take 30+ days to pay, direct debit payments are almost instant
• Customer convenience: No need for customers to remember payment dates or manually approve transactions
• Reduced admin: Businesses typically save a full day per week on invoice tracking and payment chasing

Direct debit is ideal for:

• subscriptions for things like gym memberships or software
• regular invoices such as monthly retainers (for fixed or variable amounts)
• accepting instalments to help customers spread out their costs
• collecting rent from tenants

Direct debit features that benefit small businesses

Modern direct debit solutions offer powerful features designed to save you time and improve your cash flow. Look for providers that let you:

• Scheduled payments: Set up recurring payments for subscriptions or regular invoices so you can set and forget.
• Automated reconciliation: Connect your direct debit provider to your accounting software to automatically match payments to invoices, saving hours of manual admin.
• Flexible payment options: Give customers the choice to pay one-off invoices or set up recurring payments, making it easier for them to do business with you.
• Reduced paperwork: Move away from manual invoicing and chasing payments. Digital mandates and automated collections streamline your entire accounts receivable process.

How does direct debit work?

Direct debit works through a simple three-step process:

1. Customer authorisation: Your customer completes a direct debit form (also called a mandate) giving you permission to collect payments
2. Payment notification: You send advance notice stating the amount and collection date
3. Automatic collection: Payment transfers automatically on the due date without customer action

How to set up direct debit

Setting up direct debit through a provider typically takes these five steps:

Setup phase:

1. Choose your provider: Create an account through their website or your accounting software
2. Add customers: Send direct debit forms via email for customer completion and authorization

Implementation phase:

1. Configure payments: Set up recurring subscriptions or one-off payment collections
2. Automatic notifications: Your provider handles required advance payment notices to customers
3. Payment processing: Funds clear to your account minus provider fees (typically $2 maximum per transaction)

Direct debit fees and costs

Many direct debit providers charge only for each transaction, so you pay only for what you use. This keeps costs low for any business.

Providers usually charge a small fee per transaction, either a fixed amount or a percentage. Some providers cap their fees for larger payments. Compare providers to find the best pricing for your business.

Direct debit integration with accounting software

Connecting your direct debit system to your accounting software lets you automate your payment process.

This eliminates manual data entry, reduces errors, and gives you a real-time view of your cash flow.

How long does a direct debit take?

Direct debit payments take up to five working days to clear. This is slower than other online payment methods because you're pulling money from the customer's account rather than them pushing it to yours.

Direct debit collection options

You have two main options for implementing direct debit:

• Through your bank: Setup difficulty varies by location and can involve lengthy negotiations in some countries
• Through a direct debit provider: Service levels and fees vary significantly, so compare multiple providers before choosing

What about direct debit indemnity?

Direct debit indemnity gives customers the right to cancel transactions and receive refunds. Rules vary by location, but refund requests are generally difficult to dispute even when you disagree. For example, Australia's ePayments Code outlines a formal process for users who report a mistaken internet payment within specific timeframes, which can extend up to seven months after the transaction.

Key considerations:

• Dispute rate: Only 1 in 500 direct debit transactions get disputed
• Risk management: Avoid using direct debit for high-value transactions due to refund risks
• Compliance: Ensure your provider follows local regulations for your customer locations

Direct debit services for small businesses

Fewer companies offer direct debit services for small businesses, but this is changing and there are trusted options available.

GoCardless and Payrix are respected operators that integrate with popular online accounting software.

Streamline your payments with direct debit and Xero

Setting up direct debit helps you get paid on time, improves your cash flow, and reduces admin.

Connect a direct debit provider to Xero to automate invoicing and reconciliation. Ready to take control of your cash flow? Try Xero for free.

FAQs on direct debit for small business

Find answers to common questions about using direct debit for your business below.

Can any small business set up direct debit?

Yes, most small businesses can set up direct debit. While banks traditionally had strict requirements, modern payment providers have made it accessible and affordable for businesses of all sizes, including sole traders. You'll just need a business bank account to get started.

How is direct debit different from direct deposit?

Direct debit is a 'pull' payment, where you are authorised to pull funds from a customer's account. Direct deposit (or a bank transfer) is a 'push' payment, where the customer has to manually send the funds to you. Direct debit automates the collection process for you.

Can I use direct debit with Xero?

Yes, you can. Xero integrates with several direct debit providers, like GoCardless and Payrix. This allows you to set up payment mandates and collect payments directly from your Xero invoices, with everything automatically reconciled for you.