Whether you are a sole trader, an SME or a multi-national organisation, being paid quickly is vital to your financial health and the cash flow of your business. Likewise, when it comes to making payments from your business you want to know that this has been done securely and received promptly. When paying suppliers and employees or settling invoices, it is useful to understand the main banking payment methods that are used within the UK, how they work and how quickly payments are processed. In this article we will look at CHAPS and BACS and – in particular – how they work, the timelines, the benefits and how you can open a new UK business bank account seamlessly.
Why does it matter which bank payment method you use?
Managing cash flow effectively is a key ingredient of business success. The reality is that delays in payments of even a day can significantly disrupt operations, affect relationships with suppliers and even hinder your ability to pay your employees on time. Understanding the differences between the main payment methods that are used by businesses in the UK, and how long each takes, can help your business maintain smooth financial operations.
What are the most common bank payment methods in the UK?
The two bank payment methods most commonly used in the UK are the Clearing House Automated Payment System (CHAPS) and the Bankers’ Automated Clearing System (BACS). Both payment methods allow the electronic transfer of funds from one bank account to another in a secure manner and yet each has its own unique features, advantages and processing times. In the following sections we will explain the differences between CHAPS and BACS, together with important considerations to bear in mind when deciding which to use. Indeed, you may ultimately decide to use both payment methods depending upon the kind of payment that you are making.
What is the Clearing House Automated Payment System (CHAPS)?
CHAPS, which stands for Clearing House Automated Payment System, provides a same-day automated payment system that is typically used for high-value transfers such as property or large company transactions. To use the CHAPS system payments must be of at least £10,000, although there is no upper limit to the amount that can be transferred. According to the Bank of England, CHAPS is a “sterling same-day system that is used to settle high-value wholesale payments as well as time-critical, lower-value payments like buying or paying a deposit on a property”.
When is CHAPS used?
CHAPS is used by financial institutions and very large businesses for a wide range of high-value money transfers, including the settlement of money market and foreign exchange transactions. It is also used by companies for high-value and time-sensitive payments to suppliers and for the payment of taxes. Solicitors and conveyancers also use CHAPS to complete housing and other property transactions.
What are the key features of CHAPS?
The key features of CHAPS are as follows:
- It guarantees same-day payment as long as the payment is made before the cut-off time, which is normally 3.00pm. Your bank can advise you of the applicable cut-off time.
- There is a fee of between £20 and £35 for using CHAPS. The fee that you will pay will depend upon your bank.
- Payments made by CHAPS arrive in the bank account of the receiving party on the same day, typically within a couple of hours.
- The CHAPS system is open from 6am to 6pm, Monday to Friday (excluding bank or public holidays in England and Wales).
How Long Do CHAPS Payments Take?
CHAPS payments are processed on the same day, usually within two hours. The exact time that it will take to transfer your money will vary depending upon the banks involved (i.e. the sending and receiving banks) and when the instruction is made. As long as the payment instructions are made before the cut-off time, the funds will be received on the same business day. When payment instructions are made after the cut-off time then the recipient may receive the funds on the following business day.
Although CHAPS payments are processed quickly they are normally subject to higher fees when compared with other available payment methods. These fees are easily justified, however, by the assurance that a large financial transfer has been made quickly and securely.
What are the benefits of CHAPS?
CHAPS offers several advantages for businesses in the UK:
- Speed – CHAPS guarantees same-day transfers, which makes it perfect for urgent and time-sensitive payments.
- Certainty – Once a CHAPS payment is made it is irrevocable – i.e. it cannot be reversed. This gives businesses using CHAPS certainty regarding large transactions.
- High Value – CHAPS is suitable for large payments and removes any need to make several smaller payments.
What is BACS?
BACS stands for Bankers’ Automated Clearing System, which is the payment system used for the processing of Direct Debits and Direct Credits. Businesses across the UK use BACS for payroll, paying suppliers and other recurring payments. BACS is used for lower-value money transfers of up to £250,000.
What are the key features of BACS?
The key features of BACS are as follows:
- Used for lower value and frequent payment transfers between bank accounts.
- There is an upper limit of £250,000 on BACS transfers.
- Reliable and efficient, particularly for bulk payments.
How Long Do BACS Payments Take?
BACS payments take three working days to clear (i.e. to appear in the recipient’s bank account). This makes BACS useful for planned and regular payments, rather than urgent and/or time-sensitive financial transactions. Although BACS does not provide same-day payment, knowing that there is a three-day clearing period still enables businesses to manage their cash flow more effectively.
What are the benefits of BACS?
The BACS payment system offers a number of advantages to businesses in the UK. In particular, it is:
- Convenient – BACS is convenient because it can be automated for recurring payments, streamlining payroll and supplier settlements.
- Cost-Effective – BACS has lower fees compared with CHAPS, making it more cost-effective to make regular, bulk monetary transfers.
- Reliable – BACS is well-established in the UK and trusted by businesses for routine transfers.
Should I choose CHAPS or BACS?
Businesses tend to use both CHAPS and BACS, depending upon the nature of the individual transaction. If your payment is urgent and for a high-value amount then it is always advisable to use CHAPS. If, on the other hand, you need to make regular or bulk payments of smaller amounts then BACS is the method to use.
When deciding which payment method to use, we recommend taking into account the cost, timing and volume of the transaction/s. CHAPS transfers tend to have higher fees, so it is important to weigh this against the urgency of the payment. If your transfer/s can be planned in advance (e.g. for payroll) then BACS may be more suitable for your needs. Furthermore, if you have a high volume of transactions then the lower cost of BACS can result in significant savings over time.
Use our fast-track bank referral service
As specialists in UK company formation, we understand the importance of opening a business bank account, especially for start-ups. Choosing the right bank now will make it easier for you to run your business, access funds, borrow money, make money transfers, manage your finances and build credibility with your clients and suppliers.
Uniwide Formations has trusted relationships with a wide range of highly reputable banks. If you use our business bank account fast-track referral service for limited companies then we can introduce you to a UK bank, thus streamlining the whole account opening process for you. We provide a choice of business accounts across as many as eight banks and payment institutions, including Barclays and Revolut, each of which has an easy online application process.
If you would like to use our fast-track bank set-up service then you can simply use the application form toward the end of your online application to register your new UK limited company. Once you have completed your online application to register your company your details will be sent securely to your chosen banking provider. Your chosen bank will then contact you, within 48 hours of your company becoming registered, to arrange an appointment with a bank business manager to open your new business account. Depending upon the bank that you choose, however, it may even be possible to open your account immediately and get a new bank account number and sort code straight away.
Final words
Understanding CHAPS and BACS can be very useful for managing your cash flow and company finances effectively. Remember; CHAPS is the better choice for urgent, high-value transactions; whereas BACS is ideal for regular, bulk business payments (e.g. payroll). If you are still unsure then speak with your bank, who can advise you further.
Through our fast-track bank referral service we can introduce you to a range of highly reputable banks and make it far easier for you to set up the business bank account for your new company. We can also advise on the range of options for business banking accounts for non-residents.
