Small Business: How to avoid bad checks

If you're going to accept checks at your

If you're going to accept checks at your small business, then you need to be smart about who you accept them from and have a clear check-acceptance policy with follow-up measures, experts say. (Credit: iStock)

Jamie Herzlich

Newsday columnist Jamie Herzlich Jamie Herzlich

Herzlich writes the Small Business column in Newsday.

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More than 400 million bad checks are written each year. Whether written intentionally or not, bounced checks can be a headache for small businesses, especially those with tight cash flow.

If you're going to accept checks, then you need to be smart about who you accept them from and have a clear check-acceptance policy with follow-up measures.

"Businesses need to not just accept checks blindly," says Michelle Dunn, a Plymouth, N.H.-based collections expert and author of "Ultimate Credit and Collections Handbook: The Check Is in the Mail!" (Entrepreneur Press; $29.95).

Businesses don't have to accept checks, but those that do need to be proactive, and that includes knowing how to spot a questionable check, says Dunn.

Among her suggestions:

1. If the customer is present, examine the check and make sure his or her name and address is printed on it and not handwritten or typed in.

2. Make sure customers put the correct date on their checks and don't postdate it.

3. Ask for ID to make sure it matches the name -- and signature -- on the check.

4. If the customer isn't present and pays by check regularly via mail, then you may want to prequalify customers as you would if you were extending credit, Dunn suggests. Have them fill out a credit application and check their credit. If their credit is suspect, you may not want to accept a check, she says.

5. Businesses should have a clearly stated check-acceptance policy on their bills, she says. Note any penalties or fees that customers or clients may be subject to if a check bounces.

If a customer's check bounces, first give him or her the benefit of the doubt, advises Don Hochler, who heads an East Meadow law firm specializing in medical-practice acquisition and commercial collections. It could be an honest mistake.

"You don't want to alienate someone," he says. Call the person and say, "I'm sure it's an oversight," and explain the situation.

Businesses might even have a subordinate make the call to set up another level of contact between you and the client, Hochler suggests.

Avoid accepting another personal check. Ask for a bank check or money order, or even offer to send someone to pick it up, says Hochler.

Arthur Katz, president of Knockout Pest Control in Uniondale, says he's found that in most cases, people who have had checks that bounced want to rectify the situation.

"Most people are embarrassed by it and make good on it right away," says Katz, who receives a high volume of checks and has had very few returned due to insufficient funds.

His company has a $25 returned-check fee that "many times we'll waive because times are tough," he says.

Some businesses that receive a bad check from a customer won't accept a check from them as a form of payment again, says Elizabeth Milito, senior executive counsel for the Small Business Legal Center at the National Federation of Independent Business in Washington.

A business' first move should be to call errant customers in a nonthreatening manner, she says.

If they don't make good on their bill, the next step could be a certified letter, with return receipt requested, restating the facts.

That move lays the groundwork for potentially sending the matter to a collection agency or small claims court.

"If you're going to court, they always want to see what efforts you made to collect it," Milito says.


COSTS CAN ADD UP

The average bank fees on a bounced check are between $20 and $30 per transaction.

Source: Michelle Dunn