Check It Out

This story appears in the July 1997 issue of Startups. Subscribe »

When customers at Kay and John Pirolli's Summerfield Market in Petersburg, Michigan, wanted to pay for their grocery purchases by check, the Pirollis gladly obliged them. The Pirollis routinely accepted payroll checks and checks for more than the purchase amount. "We knew three-fourths of the people in town, so we weren't that strict," Kay says. As a result, the Pirollis got stuck with more than two dozen bad checks every year. "People would buy a soft drink and a candy bar, and write a check for $25 or $50," explains Kay. "They used us like a bank, and sometimes their checks weren't any good."

In 1994, after a decade in business, the Pirollis established a strict check-acceptance policy. They take checks only for the purchase amount, cash payroll checks only from customers they know, and never accept two-party checks. In addition, employees are required to sign their initials on checks they accept. "No one wants to have their initials on a check that might bounce," Kay explains, "so this way, our employees are careful about cashing large checks from people they don't know well."

With their tougher policies in place, the Pirollis received only five rubber checks in 1995 and even fewer last year. Equally important, the Pirollis have their customers' support. "We put a sign at each register explaining our check-cashing policy, and our customers have been very understanding. We haven't lost any customers," Kay notes. As the Pirollis learned, a sound check-acceptance policy is the best way to keep bad checks out of your cash register. Here are seven steps you can take to establish your own check-acceptance policy:

1. Start with good basics. 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. Another good tip: Ask for the customer's home and work telephone numbers, so you can contact him in case the check bounces.

2. Be observant. Desktop-publishing software, laser printers, and scanners make it easier these days 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.

3. Be cautious with new checks. A large majority of bad checks are written on new accounts. When a customer writes a check on a brand-new account which doesn't show his printed name or has a low check number (say, below 300), protect yourself. Ask to see two forms of identification and ask for the customer's home and business phone numbers.

4. 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.

5. Keep your cool. Phil Hall, president of Open City Communications, a New York City-based public-relations firm for small businesses, makes it a practice not to lose his composure when he receives a bum check from a client. "There's nothing gained by being angry or hostile about the situation," says Hall. "I tend to be optimistic in terms of how people operate, and don't think most people go out of their way to bounce a check." When they do, Hall calls the client to explain the situation, and requests immediate payment plus reimbursement for any bank charges he has incurred. "Keep a positive outlook and don't get riled up. More often than not, the situation is completely accidental."

6. When dealing with it on your own, take legal action. If you don't get satisfaction, you can prosecute. Your local law enforcement, however, might be too busy to help you out, especially if the checks are written for small amounts. "We first had to send a bad-check notice to a customer by certified mail," Kay Pirolli explains. "The customer had five days to respond. Once they signed for the letter, we could call the sheriff's department and they would send someone out and collect on the check. Or you could prosecute and the person could be sent to jail." But, Kay admits, the process is time-consuming, and there are no guarantees. "You have to be able to identify the person as the individual who wrote the check. Otherwise, the person can simply claim his checks were stolen." And now, most local law-enforcement agencies are too busy to put bounced checks high on their priority list.

7. Consider electronic help. If you process a large volume of checks, consider 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 check-out stand. If the check matches a name in the company's database, the check is refused.

Using a "check reader" is quick and efficient, notes Jalinna Jones of TeleCheck, a check-verification and -guarantee company based in Houston. "We can approve a check within ten seconds," she claims, "which is generally as fast or faster as a merchant getting acceptance for a credit-card purchase."

Check-verification companies also offer a check-guarantee service. "If a check is approved by our company," Jones explains, "and it later turns out to be a bad check, we will reimburse the merchant for the value of the check. Our guarantee service reduces the risk of accepting bad checks."

Getting a handle on the bad checks that might pass through your business certainly has its benefits. "For small merchants," notes Jones, "one bad check can wipe out an entire day's profits."

Resources

Put a stop to bad checks today. Consult these helpful resources:

Check Fraud Prevention Manual provides information on how to detect fraudulent checks, how to adopt procedures to reduce your business's exposure to bad checks, and where to turn for help. Cost is $99 for members and $150 for nonmembers. Contact the American Bankers Association, 1120 Connecticut Ave. N.W., Washington, DC 20036, or order through the association's customer-service department at (800) 338-0626.

"Common Sense Guide to Check Acceptance" offers guidelines to follow when cashing or accepting checks. This free brochure is available by sending a SASE to Check Technologies, P.O. Box 659595, San Antonio, TX 78265.

The American Collectors Association can provide a list of collection agencies, including electronic check-verification and check-guarantee services. Contact the association at P.O. Box 39106, Minneapolis, MN 55439-0106, or call (612) 926-6547.

Contact Sources

Mrs. Kay Pirolli

Summerfield Market3986 Sylvania-Petersburg Rd.Petersburg, MI 49270(313) 279-1615Mr. Phil HallOpen City Communications292 Fifth Ave., #200New York, NY 10001(212) 714-3575Ms. Jalinna JonesTelecheck5251 WestheimerHouston, TX 77056(713) 599-7359