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The Risks of Accepting Checks

Bounced checks, fraudulent check writers--these problems can potentially cost you big bucks. Follow these guidelines to reduce your risk.

Opinions expressed by Entrepreneur contributors are their own.

Q: I'm opening a business andwant to know what kind of check policy I should have. If someonebounces a check, do I lose the money? How can I protect myselfagainst fraud and returned checks? How does accepting checks overthe Internet differ from accepting paper checks? Do the same rulesapply?

A: To help prevent returned checks,follow these fraud-prevention tips from experts such as theNational Crime Prevention Council, the National Check Fraud Centerand Bankrate.com:

  • Always ask to see the check writer's driver's licenseor identification card. Compare the signature and the address onthe card with the information on the check. A photo ID is evenbetter.
  • Ask the purchaser to sign the check in your presence andcompare it with the signature on the identification.
  • Accepting check cards, such as MasterCard's Master MoneyCard and the Visa Check Card, may actually be safer than takingpaper checks. A check card is an instantaneous debit from thepurchaser's bank account, while paper checks can take up to 14days to clear. In addition, the billing address on the check cardcan be verified with the Address Verification Service, the samesystem used to verify addresses for credit cards.
  • Never accept a double-endorsed check, which is a check made outto someone else, who then supposedly signs it over to the personwho submits it as his or her payment for a purchase.
  • Never accept payroll checks.
  • Watch for checks with low numbers. Nine out of 10 bad checksbear numbers from 101 to 499, which usually indicates a newaccount.
  • Look for apparent alterations in the check (e.g., changes inthe handwriting, water spots, color or background picture). Thiscould mean it's a forgery.
  • Don't accept pre-dated or post-dated checks. The funds maynot be available in the account when you try to deposit it.
  • Compare the last three or four digits of the Federal Reservenumber in the right-hand corner of the check with the first threeor four digits of the routing and transit numbers on the bottomleft of the check. They should match.
  • Establish a waiting period for refunds. Make certain yourcustomer's check clears before refunding the money.

Guarantee Your Money
Checks are most frequently returned for nonsufficient funds orclosed bank accounts. If you accept checks as payment for goods andor services and you want to ensure that you receive your funds, youmay want to contract with a check guarantee service. If your creditcard processor is a one-stop-shop transaction processing company,signing up for check guarantee services is as simple as checkingoff a box on your merchant application.

With a check guarantee service, you run your customer'scheck through your point-of-sale terminal, which connects directlyto the check guarantee service. The service reviews its database ofgood and bad check writers, and if your customer does not appear inthe negative database, you can probably accept the check. Keep inmind, this review does not guarantee that there are sufficientfunds to cover the check. If it bounces, your bank account will bedebited for the full amount. But you can then submit the check forreimbursement, following the service's specific criteria, andthey will reimburse you for that bad check.

Internet Checks
Virtual checks, an online payment option rapidly growing inpopularity, present some additional challenges. Because this is anon-face-to-face transaction, you can't ask for a driver'slicense to compare the signature. There is no signature-onlythe consumer's online agreement. And because it is not aphysical check, you can't look for the inconsistenciesmentioned earlier. To protect yourself from Internet fraud,don't ship the merchandise until the virtual check clears.

Check Policy
Post your check policy in full view of your customers-whetherit's a brick-and-mortar environment or your Web site. Makecertain your customers are aware they will be charged a penalty ifthey bounce a check. Establish a policy that fits your company, andmake certain your employees understand and implement it. Each statehas specific laws about fines and fees for returned checks.Merchants should verify and post these laws where customers can seethem.

Check acceptance boosts sales; safe check acceptance is amatter of being careful. Investing in a check guarantee service isa business strategy that you must evaluate for your needs. But evenif you don't select one of these services, be cautious on thefront end: When your customer issues you a check, be sure toconfirm his or her identification, telephone numbers, addresses,the MICR code numbers and the signature on the check. This may saveyou from financial loss.

- 2001 Cardservice International Inc.

Tim Miller is COO of Cardservice International and has more than 15years of experience in the credit card processing industry.


The opinions expressed in this column arethose of the author, not of Entrepreneur.com. All answers areintended to be general in nature, without regard to specificgeographical areas or circumstances, and should only be relied uponafter consulting an appropriate expert, such as an attorney oraccountant.

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