One of the most universally frustrating problems for landlords can be tenants who don’t pay their rent on time – or, in some cases, at all. Simply Business reports that 40 per cent of landlords in the UK have had to deal with tenants who don’t pay, and with rent arrears accounting for some £900 million in costs to landlords and letting agents annually, it’s clear it’s a widespread and serious issue.
The process of collecting rent is a key element of your business. Your ability to make your buy-to-let mortgage payments on time, for example, is dependent upon positive cash flow, and cash flow is dependent on your tenants paying the right amount, at the right time, every time.
When it comes to the rent, some landlords still literally collect it, calling in to pick up cash or a cheque from the tenant each month. In the case of cash, you know immediately if there’s a problem with payment; they either have it or they don’t. With a cheque, you have to trust it won’t bounce, and have to wait until it goes through the bank’s clearing process to find out. In both cases, you have to go to the bank to pay them into your account.
Alternatively your tenant might send you a cheque in the post. The danger with this method is that they might forget, or be ill and unable to get out to post it. And you still have to take it to the bank to pay it in when it does arrive, and wait until it goes through the clearing system before the money properly enters your cash flow.
Today, many landlords prefer for rent to be paid by standing order – but that, too, has its problems. For a start, you have to rely on your tenant to set up the standing order with their bank, and to change the amount immediately when you notify them of a rent increase.
In all of these scenarios, you aren’t in charge – your tenant is – and that isn’t good for your cash flow. So what’s the solution?
Arguably the best method of rent collection is Direct Debit, and it’s a process that’s good for both you and your tenant. Direct Debit is a safe, reliable, and commonly used payment method. Your tenant is protected by the Direct Debit Guarantee, giving them reassurance that if you take the wrong amount, or collect payment on the wrong date, then they have recourse to reclaim the funds. For you, the main benefits are time savings, and reduced risk to your cash flow.
Once the Direct Debit is set up, the payment is withdrawn from your tenant’s bank account on the date agreed. When the rent goes up, you simply amend the amount of the Direct Debit to reflect that. You don’t have to go chasing round for underpayments or late payments, and you know exactly when the money will hit your bank account as cleared funds.
Of course, payment might still fail for some reason, but if it does, then you’ll be notified and provided with all the relevant information so you know exactly where you stand. You will also be notified if the tenant cancels the Direct Debit with their bank.
If you want to start using Direct Debit to collect your rental payments, then there are two options: you either need to be approved by a bank, or else you can contract with a payment processing company who will collect payments on your behalf. Whichever option you choose, implementing a Direct Debit collection system for rents can be a positive step towards helping to avoid rent arrears building up and protecting your cash flow.