What to Do When a Customer's Check Bounces

Even in today's increasingly automated society, many small business owners still have customers who pay with checks --whether it's at the point of sale in a retail store, or mailing in payments to a service business. But when a customer's check bounces and you don't get paid, how can you recover the money you're owed?

To understand your options for recovering payment from a bad check, it helps to understand what happens when you deposit a customer's check. After you deposit a check, your bank credits the amount of the check to your account and begins the process of collecting that amount from your customer's bank.

Clearinghouses help banks by routing checks to the appropriate financial institutions and providing settlement services. Your bank's clearinghouse "presents" the check to your customer's bank. If the funds are not available in your customer's account, the request for payment is declined. Checks can be sent through the clearing process only two times. After that, the check is returned to your bank.

Your bank debits your account and sends the check back to you, explaining the check was returned for insufficient funds. The bank's involvement stops here, and sole responsibility for collecting the funds now falls on you.

Here are four ways to help prevent bad checks and boost your chances of getting what you are owed:

1. Subscribe to a check authorization agency. These services let you scan a customer's check at the point of sale to determine whether a customer has bounced checks recently. If they have, you can refuse to accept their check.

2. Ask your bank to notify you the first time a check doesn't clear. Many banks automatically send checks through the clearing process twice before they return them to you. If your bank notifies you the first time a check is rejected, you can call your customer's bank and ask whether the funds are currently available. If they are, you can then redeposit the check.

3. Try electronic check re-presentment. Although checks may go through the traditional clearing process only twice, electronic check re-presentment gives you a third chance to get paid. By this method, checks are cleared through the Automated Clearinghouse Network (CAN), the computer network financial institutions use to electronically exchange payments and remittance information. Check with your bank to see if it offers check re-presentment services or contract with an electronic-recovery company. You can also do electronic check re-presentment yourself. For more information on electronic check collection, contact the National Automated Clearing House Association.

4. Go to the bank the check is drawn on. Once a check has bounced and been returned to you, you can still take it in person to the bank it's drawn on and get paid if the money is in your customer's account. Call the customer's bank to check if the funds are there; when they are, be ready to go collect the money.