7 reasons to collect rent by direct debit
Perhaps the biggest challenge facing letting agents, and indeed anyone managing their own property portfolio, is ensuring that rents are collected on time, since prevention of rent arrears in the first place is obviously preferable to chasing late payments, and the fees which may become involved. Automatically collecting rent payments from tenants via mechanisms like direct debit may be the answer.
1. Initial setup, then automatic collection each rent cycle
Direct debit setup is very easy, with the payer providing their bank details to the direct debit service provider or merchant’s bank, and each month thereafter this money will be collected automatically into the agent or landlord’s bank account. Direct debit allows for the collection amount to vary from month to month and this may also be used to facilitate the collection of fees and deposits at the outset of a tenancy, if desired by the agency, and if agreed with the tenant.
2. Set collection dates to suit when the tenant is paid
Tenants often request that rent be collected on a date that suits them best, e.g. immediately after their pay day. It often makes sense to cater to these requests since it minimises risk of missed or partial payments. Many direct debit services will allow you to set up each tenant to pay on their own preferred day of the month.
3. Automated alerts when rent is paid (or not)
Modern direct debit facilities, particularly through online service providers and the more forward-thinking banks, will provide automated summaries of funds collected, as well as, and perhaps more importantly, automated alerts when rent is not paid. These will arrive by email or some other form of electronic notification, and can be assigned to the relevant staff members for escalation.
4. Ability to collect one-off charges (with permission)
Other charges will arise throughout the course of the tenancy, and with the direct debit already in place it may be convenient to collect these automatically also. But ensure that any payments collected are fully aligned with your payment schedule and agreement, and where possible agreed with the tenant prior to collection. Otherwise you may encounter chargebacks which could result in money being repaid to the tenant. However, when payments fail the best solution is manual human intervention and a chat about catching up with a failed payment and settling any related late or missed payment charges. Otherwise, the collection cycle will degenerate into a vicious circle of failed collections and late payment charges which benefits no-one.
5. Make bank reconciliation easier
Rather than receiving ad-hoc payments during the week by cash from people calling to the office, cheques needing lodged, and random transfers into your bank account, a direct debit will come with a detailed schedule highlighting exactly who paid what and when. This makes bank account reconciliation a much more focussed and efficient process.
6. Facilitate rent increases
Although rent will typically not vary during the course of a tenancy, when the tenancy runs beyond the original agreed period or a new tenancy is commenced, the existing direct debit can simply have the collection amount modified by the agent or landlord, usually through an online interface, with no disruption to the tenant or the payment schedule. Compare this with changing a standing order which depends on the tenant calling into their bank to cancel the old one and set up a new one. Inevitably this process will drag on and then a monthly payment will be missed and need chased.
7. Reduce rent arrears
Anything that makes the payment of rent easier for the tenant and therefore simpler for the landlord or agent, will serve the overall goal or reducing rent arrears, eliminating the associated management overhead, and keeping cashflow healthy for the agency and all landlords involved. The reduction in people calling to the office to pay rent will also remove distractions and make staff more productive.
However, be aware that the direct debit guarantee scheme affords a level of insurance to the payer to prevent unauthorised payments being collected, since by signing a direct debit form they are effectively giving the landlord or agents a free rein to take money from their account. A tenant can raise a claim under the direct debit guarantee scheme if they believe they have been charged incorrectly or without permission, which could result in a chargeback to your account. Such chargebacks are rare, but it might be worth also considering collecting rent by debit or credit card and not relying solely on direct debits to offset this risk.
Of course, automated rent collection is only one part of the puzzle, and a dedicated property management software package such as RentPro will prove instrumental in keeping tabs on all rents being applied, income being received (by whatever means), and levying appropriate management charges (as well as much, much more obviously). If you’re a property manager or letting agent looking for a new or alternative property management solution then please sign up for our free 14-day trial to see how RentPro can help you grow your business today.