Standing Order

Standing Order Meaning

Standing order is defined as an order given by account holders to their banks to initiate the automatic payment of their recurring expenses. These expenses could be fixed rental payments, monthly subscriptions and internet charges, among others.

For instance, think of the fixed monthly payment you make for an online streaming service. Many people relieve themselves of this burden by delegating it to their banks instead.

Explanation

The term standing order has wide usage in the banking sector. This facility allows the banker to take one-time approval for a recurring transaction from the customers. The payment amount is usually fixed. However, only the transactions of recurring nature can be affected by the banker.

Purpose

It acts like an assistant to individuals for timely payment of their bills. Standing orders are also a fit for organisations with a low number of parties. Such organisations enter into an automatic payment agreement with their customers to receive regular payments.

Standing order vs Direct debit

All good so far, but what if the amount of expense varies like for a credit card bill? For such cases, direct debits are massively helpful. With Direct debits, you can quickly pay variable dues such as credit card bills, mobile bill payments, etc.

How to Setup a Standing Order?

Standing Order

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For eg:
Source: Standing Order (wallstreetmojo.com)

  • You can set it up through internet banking/phone banking/ by submitting a form to your bank’s nearest branch. Don’t worry; the receiver cannot demand the bank to issue them payments directly from your account.
  • The company needs to provide the following information for the first time set up:
    1. Bank account number of the recipient
    2. Amount of payment
    3. Frequency of payment along with the payment date

If there are any changes to the parties involved in the transaction, the date of payment, or the transaction amount, the customer would need to inform the bank regarding the changes. Until the details are updated, the process will continue as decided previously.

Examples

Example #1

ABC Corporation has taken a premise on rent. The monthly rental expense is $5,600, which gets due on the 10th of every month. ABC Corporation can automate such a payment using a standing order.

Solution –  Initially, the banker will ask for specific details from the ABC Corporation. Once the approval is received, the banker will automatically pay the rent of $5,600 on the 10th of every month. In case the said date is a public holiday, the amount will be debitedDebitedDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more from the bank account the following business day.

Example #2

Amazon and Netflix run on a standing order basis for payment of their annual subscription fees. It ensures uninterrupted service to the customer & company receives automatic payment routed through the bank account.

Standing Order Application & Format

#1 – Format for Organisations Making Written Applications:

[Your name] / [Name of Organisation]

[Address line 1]

[Address line 2]

[Postcode]

[Bank name]

[Adressee]

[Address line 1]

[Address line 2]

[Postcode]

[Date]

Subject: Standing Order for payment of business expenditure

[Current account number]

Dear Sir/Madam,

Please debit from our current account the amount of $_______ per month and remit it into the following account:

Deposit/savings account number:

Bank (if different):

Branch Identification code:

Starting on [DD]/[MM]/[YYYY] until [DD]/[MM]/[YYYY]

Thanks & Regards,

[Name of Organisation]

[Name of Signing Authority]

#2 – Form of Standing order (Online / Physical)

Standing order Online Form

Source: https://www.barclays.co.uk/

Cancelling Standing Order

  • You may cancel an existing standing order using internet banking, mobile banking, or visiting the bank’s nearest branch.
  • Firms can cancel automatic payments when possessing insufficient funds. However, they must ensure that the necessary dues are paid on time to avoid degrading their credit history.
  • When cancelling, notify the recipient in advance about the cancellation. It prevents from incurring additional interest or penalty arising out of delayed payments. Companies spell out such details in the agreement with the recipient
  • After the cancellation, the account holder should ensure that no further amounts are getting debited in the name of the automation. You can ask for a refund from the bank if the automatic debiting does not end despite cancellation.

When to use

Mentioned below are some standing order examples.

  • Rental expense
  • Credit card bills
  • Telecom bills and internet charges
  • Subscription to units of mutual funds on SIP basis
  • Fixed transfer of the amount to a specific person
  • Monthly/ quarterly subscription fees

Advantages

  • Easy set up through conventional methods.
  • Timely payment of fixed dues.
  • No loss to the credit profile.
  • Cost-effective as the banker levies no charges for the facilitation of such a service.
  • When used by a supplier, it boosts their confidence in assured payments from their customers.

Disadvantages

  • Changes cannot occur to the automation data without the approval of the bank.
  • Updating the changes to the data often takes time.
  • The accountant receives such information around month-ends, thus leading to reconciliation differences.
  • Sometimes, asking the customers to opt for such a service is difficult as some of them prefer to stay away from automatic payments.
Key Takeaways
  • You can give your bank a standing order to pay for your fixed monthly expenses automatically. This way, you don’t have to pay them personally every month.
  • Some examples of such expenses are property rent, Netflix subscription fees and internet charges.
  • You can opt-out of this service by notifying your bank.

Recommended Articles

This article has been a guide to Standing Order and its meaning. Here we discuss its purpose, examples, format and how to set it up and use. You may learn more about financing from the following articles –