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Accepting Checks

Bad checks can put a dent in your cash flow. Protect yourself with these tips.

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Bounced checks can cut heavily into a small business's profit. Yet, a business that doesn't accept personal checks can't expect to stay competitive. How can you keep bad checks out of your cash register? Here are some steps to establishing a check-acceptance policy that works.

Start with the basics. Since laws regarding the information needed to cash checks vary greatly among states (and even within states), begin by contacting your local police department. They can familiarize you with the laws and regulations governing checks in your state. Some police departments conduct seminars instructing businesses on how to set up proper check-cashing policies.

While rules vary among states, here are some good general rules of thumb to follow. When accepting a check, always ask to see the customer's driver's license or similar identification card, preferably one with a photograph. Check the customer's physical characteristics against his identification. If you have reason to question his identity, ask the customer to write his signature on a separate piece of paper. Many people who pass bad checks have numerous false identifications and may forget which one they are using. Ask for the customer's home and work telephone numbers, so you can contact him in case the check bounces. Don't cash payroll checks, checks for more than the amount of purchase, or two-party checks.

Be observant. Desktop-publishing software, laser printers, and scanners have made it easier for people to alter, forge or duplicate checks. To avoid accepting a forged or counterfeit check, evaluate the document carefully. Smudge marks on the check could indicate the check was rubbed with moist fingers when it was illegally made. Smooth edges on checks are another sign of a possibly counterfeit document; authentic checks are perforated either on the top or left side of the check. Smudged handwriting or signs that the handwriting has been erased are other warning signs that you might be dealing with an illegal check.

Be especially cautious with new checks. A large majority of bad checks are written on new accounts. Many businesses will not accept checks that don't have a customer's name preprinted on them. If the check is written on a brand-new account (one with a check number, say, below 300), protect yourself by asking to see two forms of ID.

Establish a waiting period for refunds. Merchants can easily be stiffed when a customer makes a purchase by check and returns the merchandise the next day for a cash refund. When the check bounces, the merchant is out the cash paid for the refund. To avoid this scenario, many entrepreneurs require a five-to-seven-business-day grace period to allow checks to clear the bank before cash refunds are paid.

Consider getting electronic help. If you process a large volume of checks, you might benefit from the services of a check-verification company. By paying a monthly fee, ranging from $25 to $100 (depending on your company's size and volume of checks), you can tap into a company's database of individuals who write bad, stolen or forged checks. This is done by passing a customer's check through an electronic "check reader" at your checkout stand. If the check matches a name in the company's database, the check is refused.

Whatever check acceptance policy you develop, make sure your employees clearly understand the procedure to follow. Also be sure to post your check acceptance policy prominently where customers can see it. Specify any charges for bounced checks, what forms of ID are required, and what types of checks you will and will not accept. Posting signs helps prevent disgruntlement when customers wait in line, only to find at the register that you can't accept their check.

What if you do receive a bad check? In most cases, after a check bounces, the bank allows you another attempt to deposit it. After that, the responsibility for collecting the money falls to you. Contact the customer, either by phone or mail. (Again, consult your local police on the proper procedure; some states require that a registered letter be sent and a specific amount of time elapse before other action can be taken.) Keep your cool; there's nothing gained by being angry or hostile about the situation. Most people bounce checks by accident. Explain the situation, and request immediate payment plus reimbursement for any bank charges you have incurred.

If the person still refuses to pay, or you cannot get ahold of them, you have several options. The first, and probably the easiest, is to hold the check for a short time (up to six months) from the date it was written. Although the bank will not allow the check to be deposited a third time, they will cash the check if there are sufficient funds. Call the debtor's bank periodically to see if the funds are there. When they are, cash the check immediately.

Another option is going to the police. Since through your check acceptance procedure you collected all the information needed to prosecute, you should be able to complete the proper paperwork. However, the hassle of hiring a lawyer, identifying suspects and going to court may be more effort than you want to expend for a $200 check. In that case, your best bet is to use a collection agency.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press