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

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

Start with the basics. Since laws regarding the informationneeded to cash checks vary greatly among states (and even withinstates), begin by contacting your local police department. They canfamiliarize you with the laws and regulations governing checks inyour state. Some police departments conduct seminars instructingbusinesses on how to set up proper check-cashing policies.

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

Be observant. Desktop-publishing software, laser printers, andscanners have made it easier for people to alter, forge orduplicate checks. To avoid accepting a forged or counterfeit check,evaluate the document carefully. Smudge marks on the check couldindicate the check was rubbed with moist fingers when it wasillegally made. Smooth edges on checks are another sign of apossibly counterfeit document; authentic checks are perforatedeither on the top or left side of the check. Smudged handwriting orsigns that the handwriting has been erased are other warning signsthat you might be dealing with an illegal check.

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

Establish a waiting period for refunds. Merchants can easily bestiffed when a customer makes a purchase by check and returns themerchandise the next day for a cash refund. When the check bounces,the merchant is out the cash paid for the refund. To avoid thisscenario, many entrepreneurs require a five-to-seven-business-daygrace period to allow checks to clear the bank before cash refundsare paid.

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

Whatever check acceptance policy you develop, make sure youremployees clearly understand the procedure to follow. Also be sureto post your check acceptance policy prominently where customerscan see it. Specify any charges for bounced checks, what forms ofID are required, and what types of checks you will and will notaccept. Posting signs helps prevent disgruntlement when customerswait in line, only to find at the register that you can'taccept their check.

What if you do receive a bad check? In most cases, after a checkbounces, the bank allows you another attempt to deposit it. Afterthat, the responsibility for collecting the money falls to you.Contact the customer, either by phone or mail. (Again, consult yourlocal police on the proper procedure; some states require that aregistered letter be sent and a specific amount of time elapsebefore other action can be taken.) Keep your cool; there'snothing gained by being angry or hostile about the situation. Mostpeople bounce checks by accident. Explain the situation, andrequest immediate payment plus reimbursement for any bank chargesyou have incurred.

If the person still refuses to pay, or you cannot get ahold ofthem, you have several options. The first, and probably theeasiest, 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 thecheck to be deposited a third time, they will cash the check ifthere are sufficient funds. Call the debtor's bank periodicallyto see if the funds are there. When they are, cash the checkimmediately.

Another option is going to the police. Since through your checkacceptance procedure you collected all the information needed toprosecute, you should be able to complete the proper paperwork.However, the hassle of hiring a lawyer, identifying suspects andgoing 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 collectionagency.

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

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