An instalment plan splits one invoice into smaller payments on agreed dates, usually collected by direct debit so your customer doesn't have to remember each one. The invoice and the debt stay the same; only the timing changes. Plans suit annual fees spread across the year, large one-off bills and customers going through a short rough patch, and they work best when the collections and the matching run automatically.
In this article
The short version
- An instalment plan splits one invoice into scheduled payments.
- Direct debit is the usual way to collect each instalment automatically.
- Agree what happens if a payment fails before the plan starts.
- More instalments mean more collections, fees and matching.
- Plans for individuals may count as credit, though many interest-free plans are exempt.
How an instalment plan works
You raise one invoice as normal. Then you and your customer agree a timetable for paying it: say a £1,200 invoice paid in six monthly instalments of £200. Each payment is recorded against the same invoice until the balance reaches zero, and nothing is re-issued.
Direct debit is the usual way to collect, because once the mandate is signed your customer doesn't have to do anything on each date. You do have to tell them the amounts and dates in advance, but one accurate schedule sent at the start covers every collection on it.
Instalment plans are easy to confuse with two other things. A recurring invoice is a new invoice each period for new work, such as a monthly retainer. Buy now, pay later is a third party lending your customer the money and paying you upfront. With an instalment plan, you're the one waiting for the money, so the risk of it not arriving stays with you.
Who uses instalment plans
Most plans that work fall into one of three patterns.
Accountancy practices and membership organisations often spread an annual fee over the year. The fee is agreed once and collected monthly, so you're not waiting on one large payment in January.
A large one-off bill can be split for a customer whose income is uneven. If the alternative is a 90-day wait and a series of phone calls, a plan gives you both a schedule to work to.
You might also offer one to a customer in temporary difficulty who comes to you before missing a payment. Within a month or so you'll know whether the collections are arriving.
Plans tend to help less when the invoice is disputed, because the disagreement is still there after the schedule is agreed, or when a customer has already broken one plan and wants another.
How to set one up
- Agree the total, the number of payments, the amount of each and the dates, in writing.
- Say what happens if a payment fails: it's added to the next one, the plan runs a month longer, or the whole balance becomes due. Any of these can work, but if you leave it open, you and your customer are likely to assume different things.
- If you want to charge for the extra time with a limited company customer, agree it at the start.
- Set up the collection, normally a direct debit mandate, and send the schedule.
- Run the plan in the same system that sends your reminders, so nobody chases an invoice that's being paid exactly as agreed.
A plan multiplies the admin: six instalments mean you've got six collections, six chances of a failed payment and six payments to match against one invoice. Fees can rise too, where pricing has a fixed element. On Adfin's published pricing, a direct debit costs 1% + 20p with the percentage capped at £4. Six £200 collections cost £2.20 each, or £13.20 in all, where the same £1,200 paid in one go by direct debit would cost £4.20.
If one instalment fails, the direct debit comes back with a reason from your customer's bank, such as insufficient funds or a cancelled mandate. Insufficient funds on one date is common and often recovers on a retry. A cancelled mandate usually means the plan has stopped, and that calls for a conversation with your customer.
Adfin lets you split an invoice across any number of payments at any frequency and collects them by direct debit automatically, or lets customers pay in parts above a minimum you set, with reminders continuing until the balance is cleared. Failed direct debits are retried for free, and each payment is matched back to the invoice in Xero or QuickBooks. Its collection agents can also offer an instalment plan to a customer who's fallen behind, within the rules you set.
Instalment plans for individual customers
Where your customer is a limited company or an LLP, an instalment plan is a commercial arrangement and consumer credit rules don't apply. Where your customer is an individual, and that includes a sole trader or a small partnership, letting them pay later can count as giving them credit, which is a regulated activity.
There's an exemption that covers many plans a business offers its own customers. It applies to credit you provide for your own goods or services where the amount is fixed, there are no more than 12 payments, they're all due within 12 months, and you charge no interest or other fees for the time to pay. Add interest or a fee, or run the plan longer, and the exemption may no longer apply.
How a plan is built can change the answer, so if you bill individuals and want to offer plans as standard, take advice first. Whoever the customer is, put the arrangement in writing and don't call it a loan or finance unless it is one.
Common questions
Can I let a customer pay an invoice in instalments? Yes. Agree the amounts and dates in writing, say what happens if a payment fails, and set up a way to collect each payment, usually a direct debit.
How are instalments usually collected? By direct debit, because a mandate lets you collect each amount on the agreed date without your customer doing anything. They must be told the amounts and dates in advance.
Do I need FCA authorisation to offer an instalment plan? Not for plans with limited companies. For individuals, including sole traders, many interest-free plans of up to 12 payments within 12 months fall within an exemption, but the details matter, so take advice on your own arrangement.
Can I charge interest on an instalment plan? With a limited company customer, you can agree interest or a charge for the extra time at the start. With an individual or a sole trader, charging for time to pay can bring the plan within consumer credit rules.
What happens if one instalment fails? Whatever you agreed at the start applies, such as adding it to the next payment or making the balance due. A failed direct debit can often be retried, but a cancelled mandate usually means the plan has stopped.
Do instalment plans make my aged debtors report look worse? They can, if an invoice on a live plan looks the same as one nobody has paid. Mark invoices on a plan so you can tell them apart.
Sources
- legislation.gov.uk - The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, article 60F (accurate as of October 2026) https://www.legislation.gov.uk/uksi/2001/544/article/60F
- Bacs - Direct Debit (accurate as of October 2026) https://www.bacs.co.uk/bacs-schemes/direct-debit/
- Direct Debit - The Direct Debit Guarantee (accurate as of October 2026) https://www.directdebit.co.uk/direct-debit-guarantee/
- Adfin - Pricing (accurate as of October 2026) https://www.adfin.com/pricing
- Adfin - Accept payments (accurate as of October 2026) https://www.adfin.com/accept-payments
