The cost of bounced checks to small-business owners goes far beyond the penalty fees the banks charge for depositing bad checks. The time spent handling bounced checks and the havoc they wreak on cash flow are also part of the toll.

Fees and Costs

A merchant's bank typically charges a "protest fee" of $3 to $5 per bounced check. Some banks impose higher fees, and a handful charge up to $25 for each bad check--matching the fee typically charged to the person writing the bad check.

To avoid some of these costs, a business can use check verification and check guarantee services or collection agencies. A collection agency will typically handle the collection process at no charge to the business, instead collecting a $15 to $20 fee from the check writer.

Business owners can also use a check verification service, which electronically compares the check writer's name against a database of people who have previously written bad checks and not made good on them. In addition, businesses can enlist a check guarantee service, which actually buys the check at face value from the merchant and then attempts to collect the check itself.

Check guarantee services are more expensive, but they may be well-suited to small business owners operating in locations or in industries at high risk for bad checks. Often these business owners sign up for a guarantee service because they can't afford the losses stemming from bad checks.

Electronic Check Collection

Some businesses prepare for bounced-check collections at the time of purchase by asking customers to authorize electronic check collection. This allows the merchant to electronically debit the customer's bank account if their check is returned.

Electronic collection is cheaper and easier to do than re-sending a paper check that bounced back through the banking system. It also gives the merchant greater control over when the debit is presented to the customer's bank--after payday, for instance.

Electronic collection has been around for awhile but wasn't widely used until recently. The National Automated Clearing House Association (NACHA) created rules in late 1998 clarifying a merchant's responsibilities in using electronic collection for bounced checks. The rules require merchants to notify customers at the point of sale about the electronic collection policy. Retailers are permitted to do so with in-store signage, and utilities can include notifications with monthly bills.

The NACHA estimates that businesses using electronic collection can improve their recovery rates on bounced checks by 25 to 50 percent, significantly reducing the costs associated with bounced checks.

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