10/ 27/ 2004
by Tamara E. Holmes
Small-business owners who have cash-flow problems now have something else to think about: a new law that speeds up the check-clearing process and eliminates the return of original paper checks.
The Check Clearing for the 21st Century Act, or Check 21, goes into effect Oct. 28. For the small-business owner, the law not only affects your own business checking account, but it can also affect your business if you accept checks from customers.
Under the law, banks can now transmit electronic images of a check rather than wait for the original paper checks to make their way through the banking system. As a result, float times -- which gave business owners and consumers a day or two to ensure that funds were available in their accounts to cover checks -- are gone.
Unfortunately, though, banks don't have to make your funds available any sooner when you deposit checks.
"Money's leaving your account faster than before, but it's probably coming into your account at the same rate if your bank applies a hold. And that's what creates the new risk," said Gail K. Hillebrand, a senior attorney with the Consumers Union.
That means you can't hand out payroll checks with the knowledge that funds will be deposited by the time your employees put them in the bank. Likewise, you can't pay bills a couple of days before you're scheduled to receive funds with the knowledge that the money will be deposited in time.
If you accept checks from customers, you might be on the receiving end of their money management problems as a result of the new law. According to Houston-based Pinnacle Financial Strategies, Check 21 could result in 7 million bounced checks per month and $170 million per month in overdraft fees by mid 2005.
To anticipate check bouncing -- at least until consumers get used to Check 21 -- you might want to raise your bad-check fee for customers to ensure it covers your bank charges when you receive a bad check. Or if you have considerable trouble with bad checks, you might even consider not accepting checks for a few months until consumers can adjust their habits to the new law.
Another area small-business owners might be affected by Check 21 is in the record-keeping arena.
Because Check 21 makes use of electronic transactions that occur faster than the old process of physically moving checks from bank to bank, there's the possibility that mistakes can be made. Financial advisers are urging people to be even more diligent when it comes to monitoring their banking accounts.
The law also eliminates the return of original checks. Banks no longer have to hold onto them.
Instead, they will issue "substitute checks," which are paper reproductions of original checks that contain an image of the front and back of the check.
However, one of the limitations of substitute checks is that they make it more difficult to detect forgeries and check alterations since there often is no original check to compare with the substitute check.
They also require somewhat of an adjustment merely because they won't look like the canceled checks you're probably used to seeing.
If you're used to receiving your canceled checks, make sure you tell your bank you would like to receive substitute checks since banks are not required to issue them to their customers.
The dawn of Check 21 proves that technology affects every aspect of running a small business, including banking and cash flow. But by being on top of the changes and adjusting habits to accommodate them, you can face the new banking law without missing a beat.
