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Beware Of The Rubber Check

Aug 17, 2007
Small businesses rely heavily on maintaining a good cash flow and having their clients pay on time. When a majority of small businesses are dealing with checks written against insufficient funds, that is indeed bad news for small businesses everywhere.

Recent studies have shown that small, medium and large companies have had many bounced checks. Micro companies, with less than 10 employees, have been less affected.

This frequently happens when someone pays a business by check for goods or services. The business deposits the check into its bank. The prudent business owner checks that the check has cleared and writes out new checks based on the money that is in the business bank account. It later turns out that the check may not have cleared at all and the business owner is now overdrawn and in debt. This means steep bank charges and makes it less likely that business facilities will be extended in the future.

Understanding The Check Clearing System

Most people know that a check takes anywhere from three to seven working days to clear. The date that a check clears depends on:

1. The currency in which the check is written. For example, US Dollar checks clear more quickly than checks written in French francs.

2. Whether the bank that has issued the check belongs to the same group of companies as the recipient bank. Checks usually take longer to clear when paid outside the banking group.

3. Whether the check is paid in on a business day.

What most people don't know is that most banks 'clear' checks when the normal clearing period has elapsed. This sometimes happens before the bank has verified that the funds are available. The bank makes the amount of the check available for withdrawal but it hasn't really cleared.

Some unscrupulous people can use this to their advantage. For example, they could pay by check for goods or services, write the wrong amount on the check, ask for a refund and disappear with the money well before the check clearing process is complete. When the original check bounces, it is the small business that is left facing an angry bank manager and a large bill.

Payment Help For Businesses

Fortunately, there are now some fairly basic and relatively inexpensive ways for businesses to receive money from their customers. Here are a few "Do's" and "Don'ts" for you to follow. You can minimize or eliminate your bad check losses if you stop trouble before it starts.

1. Seek out and retain the advice of a competent Certified Public Accounting (CPA) firm. If you think you have a leaky pipe in your basement, you wouldn't want to fix it yourself, would you? (Remember "The Bill Cosby Show" episodes?) A CPA is a professional that is trained to fix leaky financial systems. Retaining a CPA not only can guard your business from bad check writing, but also may catch and flag down a whole host of uncontrolled debits against your checking accounts.

2. Convert your accounts receivable systems to one or more trusted automated systems. These will ensure that secure funds are being deposited into your accounting system for the goods you have sold or the services you have rendered.

3. Your CPA accounting firm can provide you with many leads with which you can build secure money transfer capability into your financial system. Your bank can also provide very valuable assistance. It's just a matter of doing some digging for advice and answers.

Business owners who are worried about being left with a large paper check debt should consider getting their customers to adopt one of these bill pay systems where possible. This will reduce the high business cost of bounced checks. As incentives, the business can advertise a number of "freebies" to its customers. In that manner, we all win.
About the Author
Bob Carper is a veteran information systems consultant with an MBA from Pitt. For additional information go to All About Webconferencing or Effective Web Design. You may also e-mail Bob at robertcarper06@comcast.net
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