Non-Sufficient Funds (NSF) Checks: Meaning, Impact & Steps to Avoid Them
Joe Sweeney
Oct 16, 2024
Summary
Congratulations! You've launched your business and customers are rolling in. But hold on, there can still be bumps in the road to collecting your hard-earned revenue. One such bump? An NSF check, also known as a bounced check or a returned check
This guide dives deep into the world of NSF checks, covering:
What is a Non-Sufficient Funds (NSF) Check?
Sometimes called a bounced or returned check, an NSF (non-sufficient funds) check simply means there are insufficient funds in the payer's account to cover the amount written on the paper check they provided as payment. In simpler terms, your customer wrote a check for more money than they actually have.
This can happen for a variety of reasons, like forgetting about a pending bill or miscalculating their account balance. But regardless of the reason, you're left with the short end of the stick – no payment for the product or service rendered.
The Impact of Receiving an NSF Check
An NSF check can have a significant impact on your business:
Lost Funds: The most immediate consequence is not receiving payment for the product or service rendered.
Bank Fees: You may be charged a fee by your bank for processing a bounced check.
Delayed Payments: The bounced check could cause a cash flow disruption for your business.
Administrative Hassle: Dealing with an NSF check involves extra work, like updating records, contacting the issuer, and arranging for alternative payment.
Strained Relationships: An NSF check from a customer can damage your business relationship. The inconvenience and potential for distrust can affect future transactions.
Steps to Take When You Receive an NSF Check
Here's what to do if you receive an NSF check:
Contact the Issuer: Reach out to the customer who wrote the check promptly. Inform them about the returned check and the insufficient funds issue. Maintain a professional and cooperative tone during the conversation.
Request Payment and Alternatives: Request immediate payment for the full amount of the check, including any applicable bank fees. Discuss alternative payment methods, such as electronic transfers or credit card payments, to ensure the issue is resolved quickly and securely.
Document Everything: Keep a record of all communication with the issuer, including dates, times, and details of conversations or emails. Documentation can be helpful for future reference or if legal action becomes necessary.
Contact Your Bank: Inform your bank about the NSF check and seek guidance on their procedures for handling bounced checks. They can advise you on any additional steps or fees associated with the returned check.
Review Contracts: Review any agreements you have with the issuer to check for provisions related to returned checks, penalties, or dispute resolution procedures.
Evaluate the Relationship: If similar problems with payment are happening regularly, the customer is unresponsive or their financial stability is the issue, consider rethinking your business relationship. This can help you decide how to handle future transactions or credit terms with this customer.
Collections and Legal Action (Optional): If attempts to resolve the matter fail, consult with legal professionals to understand your rights and options. They can advise you on pursuing legal action.
Adjust Internal Processes: Evaluate your internal procedures to minimize the risk of future NSF checks. Consider reviewing credit management practices, payment policies, and customer communication strategies to promote clear communication and reliable payment methods.
The Broader Problem: Check Payments are Outdated
Paper checks remain a common payment method in B2B transactions. In fact, a report by PYMNTS found that 40% of B2B transactions in the US were still paid by check in 2022.
The issue with paper checks as a payment method is that they come with inherent risks and inefficiencies:
Risk of Bounced Checks: As discussed above, when checks go wrong they can be costly - both in terms of fees and strained relationships.
Operational Overhead: Manual check processing is time-consuming and prone to errors. Someone in your business will need to literally open envelopes and cash the checks at a bank. If that doesn’t sound outdated, we don’t know what does!
Slow Payments: Checks rely on the mail system, leading to regular delays in receiving funds.
Let's take a real-world example: Veryable, an Upflow customer and company that was facing challenges with check payments.
Before Upflow, Veryable relied heavily on check payments, which were slowing down their cash flow and creating significant operational overhead.
Teonia Hansome, Staff Accountant at Veryable, noted, "Check payments are out of our control. It's primarily dependent on the mailing system. So sometimes we'll get a check three days after the customer sends it, or sometimes it's a month or two."
This delay not only resulted in late payments but also extra time wasted on back-and-forth communications with customers who believed they had sent their payments on time.
The Solution: Taking your payments online
Electronic or online payments offer several advantages over checks, making them a more effective way to reduce the risk of NSF checks and improve your overall cash flow.
First, let’s look at some different kinds of electronic or online payments:
Credit Cards: Widely accepted and convenient for both businesses and customers, credit cards offer a secure and efficient way to process payments.
ACH (Automated Clearing House) Debits or SEPA (Single Euro Payments Area) Direct Debits: ACH debits are electronic funds transfers that pull funds directly from a customer's bank account. They are often used for recurring payments or larger transactions and can be more cost-effective than credit cards. Similar to ACH debits, SEPA direct debits are used for recurring payments within the SEPA region (European Union countries, Iceland, Liechtenstein, Norway, and the United Kingdom). They offer a standardized and efficient way to collect payments.
E-wallets: Digital wallets like PayPal or Apple Pay provide a convenient and secure way for customers to store and manage their payment information. They can be easily integrated into your website or online store.
Speed: Faster Payments, Faster Cash Flow
Online payments are processed much faster than checks, often within hours or a few business days. This means you can receive funds more quickly, improving your cash flow and reducing the risk of late payments. For example, credit cards and ACH debits often offer near-instantaneous processing. This is a significant improvement over the days or even weeks it can take for a check to clear.
Security: Enhanced Protection Against Fraud and Loss
Unlike checks, which can be lost or stolen in the mail, electronic payments are typically secure and traceable. This eliminates the potential for payment delays or losses due to physical factors. Additionally, online payment platforms often incorporate sophisticated fraud detection mechanisms to identify and prevent fraudulent transactions, further safeguarding your business from financial losses and maintaining customer trust.
Simplicity: Streamlined Processes and Reduced Errors
Online payments are easier to initiate and manage than checks, reducing the likelihood of errors and saving time and effort. With online payments, your customer typically only needs to click a few buttons or enter a few details to complete a transaction. This is much simpler than writing and mailing a check. Additionally, online payment methods can be easily integrated into your business's systems, streamlining the payment process for both you and your customers. This reduces the administrative burden associated with manual check processing, freeing up your team to focus on other critical tasks.
How to Prevent NSF Checks with Financial Relationship Management (FRM)
Financial Relationship Management (FRM) is a customer-centric approach to accounts receivable that helps businesses get paid faster and more efficiently.
Similar to CRM for sales and marketing, approaching your accounts receivable through an FRM lens, supported by the right technology, empowers you to speak to your customers as individuals, tailoring the payment experience to them and ensuring you're reaching the right person at the right time and place - specifically within the finance pillar of the customer journey.
(By the way, Upflow is a pioneering Financial Relationship Management solution. Think of our solution like a CRM for customer engagement in the finance process.)
Here's how an FRM solution like Upflow can help prevent NSF checks:
Real-Time Payment Tracking: FRM tools provide visibility into payment statuses, allowing you to monitor transactions and detect potential issues early.
Payment Reminders: Automated reminders and notifications help ensure customers are aware of upcoming due dates, reducing the likelihood of missed payments.
Instant Payment Verification: FRM tools can integrate with payment gateways to verify funds before processing checks, preventing failed transactions. Within Upflow, we have our own integrated payment gateway - called Payments by Upflow - which effectively embeds modern, online payments with our customers’ cash collection processes.
Integrated Collections Management: If an NSF check does occur, FRM tools like Upflow streamline the collections process for efficient follow-up. You’ll see the full history of the issue and be able to use the visibility to resolve the problem faster.
Multiple Payment Channels: Offering various online payment options reduces reliance on checks and the risk of NSF incidents.
Data-Driven Insights: FRM tools provide data and analytics on customer payment behaviors, allowing you to identify trends and address potential issues proactively.
How Upflow Can Help
Upflow, a leader in G2’s cash collection software category, empowers businesses to go beyond just getting paid faster and use the process to improve customer relationships.
Veryable, who we mentioned earlier, successfully transitioned their customers away from check payments using Upflow. This shift resulted in faster payments, improved cash flow, and reduced operational overhead.
With Upflow, more of Veryable's customers now pay directly online, streamlining the payment process and reducing the risk of NSF checks.
This has had the added benefit of reducing Veryable’s DSO. With a 13-day, 37% reduction in DSO and enhanced customer communication thanks to Upflow, the team at Veryable is better positioned to manage their financial operations and focus on growing their business.
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