9 steps to avoid accepting bad checks: a check acceptance policy guide and template

Despite the popularity of credit cards and virtual wallets, many consumers still use paper checks—billions of them, in fact, according to the Federal Reserve. While check usage continues to drop around 4% each year, the risk of check fraud remains at an all-time high. Check fraud accounted for 60% of attempted fraud against deposit accounts in 2018, according to a survey released by the American Bankers Association. Successful check fraud accounted for more than $1.3 billion in fraud losses that year.

If your small business still accepts checks, you need to know how to spot a bad check and what to do if you find one. Use the following tips to avoid accepting bad checks that could negatively impact your cash flow.

What is a bad check?

A bad check is one that can’t be paid, either because the check writer’s bank account has insufficient funds or because the account doesn’t exist. Insufficient funds means that the check writer doesn’t have enough money in their bank account to cover the amount of the check written. This causes the check to bounce. Bad checks are also sometimes called “bounced checks,” “hot checks,” or “rubber checks.”

The writer’s bank will typically charge a fee for writing a bad check unintentionally. And if the check writer knows they don’t have sufficient funds to cover the check, writing a bad check may be a felony or misdemeanor. Laws and consequences associated with writing bad checks vary from state to state.

When a check bounces, the bank will reverse the funds from the deposit account. If that money was already spent, the recipient of the check might be left with an overdraft fee.

How to avoid accepting bad checks in 9 steps

Bad checks can be especially problematic for small business owners with tight margins. 80% of business owners say they feel stressed because of cash flow issues in their businesses, and bounced checks can exacerbate the issue. Keep your cash flow under control by stopping bad checks in their tracks. Here are a few tips:

1. Have a check acceptance policy

A check acceptance policy outlines how you and your employees will handle check acceptance and deposits. This includes asking for customer ID, examining the check for common signs of fraud, and collecting customer contact information upon payment. Employees should understand what types of checks your business will and will not accept and how to handle them.

Beyond that, a check acceptance policy clearly outlines for customers how to submit a check payment and what will happen if the check bounces. For example, you may decide to include an additional processing fee for rubber checks. This fee may serve as a deterrent to bad check writers.

If you’re not sure what to include in your policy, we’ve included a sample check acceptance policy below.

2. Check your customer’s ID

Make sure the person writing the check matches the ID. It’s good practice to write the ID number on the check itself. If the name on the ID presented does not match the name printed on the check, do not accept the check. These checks may be forged or counterfeit.

It’s also a good idea to match the address on the ID to the address on the check. Mismatched addresses aren’t automatically indicative of a bad check but may signal a problem. Avoid accepting checks with temporary addresses, like PO boxes or hotels.

3. Watch your customer sign the check

Checks that are already signed may be altered, forged, or stolen. Protect your business and your customers by accepting checks that are signed in front of you. If the signature isn’t legible, ask the customer to print their name on the check as well.

4. Look at the check number, amount, and date

Most bad checks come from small business bank accounts that are less than one year old. Use extra caution if the check has a check number lower than 125. Never accept checks with no check number or a handwritten number.

The numeric amount should match the written amount, and the date should reflect the date the check was submitted for payment. Avoid accepting postdated or stale-dated checks.

5. Review for common signs of check fraud

There are a few ways to spot a bad check. The last few digits of the Federal Reserve number at the top of the check should match the first few digits of the routing number at the bottom of the check. Checks with shiny printing and no perforated edges may be counterfeits. A fake check may be missing a bank logo, or the logo may be faded, suggesting it was copied. Additionally, fake checks may have misspellings or be missing personal information.

Look for check security features, like microprinting on the signature line, the words “original document” on the back of the check, and a security screen.

6. Keep your customer’s contact information

In the event that a check bounces, the first thing you should do is contact the customer to rectify the issue. When customers pay using a check, it’s important to get their contact information in case there is a problem with the check.

If their contact information isn’t already printed on the check, request a current address and phone number.

7. Verify your customer’s funds with their bank

When in doubt, call the customer’s bank to verify that the check is good. It takes just a few minutes to verify the funds in the customer’s account. This is especially useful for large check amounts.

Be aware that some banks will tell you only whether the account is valid. Others won’t provide any information concerning the customer’s bank account. If you’re able to verify the funds, deposit the check immediately, before the account holder withdraws additional funds or other charges hit the account.

8. Don’t spend funds from checks immediately

Funds from deposited checks will appear in your account right away, but that doesn’t always mean funds have been withdrawn from the check writer’s account. If the check writer’s account has insufficient funds to cover the check, the check will bounce and the funds will be retracted from your account. If you’ve already spent those funds, you may be left with an overdraft fee—or, at the very least, an unpleasant cash flow surprise.

It’s best practice to wait at least 30 days before spending funds from a newly deposited check. If you can’t wait 30 days, you’re better off accepting other payment methods like eChecks or ACH transfers.

9. Accept local checks only

Out-of-state checks, or checks from an out-of-state bank, pose a higher risk than local checks. This is because you can’t easily contact the bank to validate the check, and you may need to research whether an out-of-state bank actually exists. Additionally, out-of-state checks may take more than two weeks to clear, or your bank may choose to put a hold on an out-of-state check.

What happens if I deposit a bad check?

You may not know you’ve received a bad check for several weeks after you’ve deposited the check. For this reason, it’s always a good idea to hold on to deposited funds for at least 30 days to ensure the check clears. When a check bounces, the funds will be reversed from your account. You’ll likely see a debit for the same amount of the check that was deposited.

Someone wrote me a bad check and I cashed it—what should I do next?

The first thing you should do after depositing a bad check is contact the person who wrote the check. It may have been an innocent mistake. From there you can try to deposit the check again.

What if the check bounces again or you’re unable to get a hold of the customer in the first place? In this case, you may need to take legal action or use a collections agency to collect the funds. The laws and consequences of writing a bad check vary from state to state. Contact your bank and check local laws to find out what recourse you have when checks bounce.

How should I follow up after receiving a bad check from a customer?

If you have the customer’s phone number, you can call them to resolve the matter quickly. If not, sending a bad check letter is common practice. The letter simply informs the customer that their check was returned, and the reason why. It tells them when repayment is due, along with any additional bank fees they must pay. The letter also details what they can expect if they refuse to pay. Work with your business advisor to draft a bad check letter that abides by your state laws and fits the needs of your business. We’ve included a sample letter below.

It’s important to note that the following templates serve as a starting place. You should customize these templates for your business and have your business advisor review them before use.

Sample bad check letter template

[Date]

[Business name]

[Business address]

[Customer name]

[Customer address]

Dear [Customer name],

The check you wrote for $[amount], dated [date written on check], and made payable to [business name] was returned by [bank] because [the account had insufficient funds OR the account was closed].

Please submit the full payment of the check within 30 days of the date on this letter along with $[amount] in additional processing fees for a total of $[total amount owed].

Please forward your payment to the above address. Once payment has been received, your old check will be returned to you.

If the full payment is not received within 30 days, you will be charged an additional $[amount] and no further credit will be extended until the amount is paid in full.

Please contact [your name] at [your phone number] or [your email address] if you have any questions or need additional information. Your prompt attention is appreciated.

Sincerely,

[Your name]

Sample check acceptance policy template

[Business name] gladly accepts [payment methods, ex: cash, credit card, Apple Pay].

[Business name] accepts personal checks for payment when presented with photo ID under the following conditions:

• All checks must have a local, physical address.
• All checks must be signed at the time of payment; [business name] does not accept pre-signed checks.
• [Business name] does not accept checks without a preprinted name and address.
• [Business name] does not accept pre- or post-dated checks, or checks with an expiration date.
• [Business name] may ask to collect customer contact information upon receiving a personal check.

If a check is returned by your financial institution for any reason, an additional $[amount] charge will be added to the full repayment amount. Returned checks not paid within 30 days of notification may result in the incident being submitted to a collections agency or small claims court. [Business name] will not extend credit to or accept checks from anyone who has previously presented returned checks.