Part 1: Checks


By Christopher Freeburn


Paying the bills doesn't make anyone's list of favorite things to do. But, like it or not, bills come due and must be paid. No one knows that better than small business owners, who face a myriad of bills every month, ranging from office supplies and equipment leases to office rent, insurance, and marketing services.


Small business owners not only have to pay their bills, but do so in a way that lets them best manage their company's cash flow, insuring that there will be enough cash available to the business at any one time to meet all immediate obligations. In order to achieve this, small business owners must choose between the available payment options to select the one-or the combination of several-that best serves their business's needs.



The paper option


By far the most popular way for small businesses to pay their bills is the simple, old-fashioned paper check. Drawn against a bank account, checks have been the primary means of bill payment for both small businesses and consumers for decades. But that is now changing.


"Checks are facing stiff competition from other forms of payment," says Jim Sheridan, a Boston-based banking consultant. "Credit cards and electronic payment systems are growing quickly. Most businesses still use checks to pay bills, but the trend is definitely heading toward plastic and electronic payment systems. The last stronghold for paper checks are bills that are sent through the mail, but even there we are beginning to see movement away from paper checks."


Nevertheless, checks remain a popular method of bill payment by small businesses for good reasons. "There are some advantages to using checks over credit cards of electronic payments," says Sheridan.


Floating money


Paper checks still offer small businesses a short period of time between when a check is written and when the money is actually transferred out of the issuing business's account, often referred to as "float." During this time the money is still available to the business, and depending on the type of checking account, may still be collecting interest. This float period varies based on a number of variables. A check sent to a utility company, for example, will be marked as received when the check arrives in the mail, but the utility may not send the check to the bank for several days.


The leeway provided by float periods is decreasing, however. In 2004, Congress passed a law permitting banks to send electronic images of checks to each other instead of having to send the actual checks for processing. Under the law, electronic scans of paper checks became equivalent to the actual checks themselves. Since electronic transmission of scanned checks is significantly faster than actually shipping paper checks back and forth between banks, float times have fallen considerably as more banks adopt the system.


Accounting and control options


The traditional paper check also provides definite accounting advantages since the check itself becomes physical proof of a transaction. It is difficult for another party to dispute the receipt of payment if you have a copy of the cancelled check. In recent years, many banks have moved away from returning the actual cancelled checks along with your monthly account statements in favor of printed images of the checks. "It is far more cost effective for banks to print a scanned image of the cancelled check on your statement than it is to physically send you the actual check," explains Sheridan. "Both in terms of the resources needed to transport the actual check to your local bank and then send it out and the mailing costs of doing so." The scanned images on your monthly statement, however, still constitute valid evidence of a completed transaction.


Checks also allow a small business owner to change his or her mind and cancel the payment, even after the other party has received the check. A "stop-payment order" placed on a particular check will cause the bank to decline it. This ability can prove useful to small business owners if a given good or service is found unacceptable after the check has been written. However, most banks charge a fee for a "stop-payment" order, and stop-payment fees are usually among the highest charged by most banks, ranging from $15-$35 per stopped check. "Stop payment fees are like an insurance premium for the bank," explains Sheridan. "If you issue a stop payment order on a check and the bank accidentally pays the check-which does occasionally happen due to miscommunications-then the bank is liable for the amount of the check, not the customer."


Disadvantages of checks


The once unassailable dominance of paper checks as a means of paying bills has been eroding because of the clearest advantage of credit cards and electronic payment methods: cost.


Depending on your bank and type of account, your bank may charge you a small fee for processing every check you write. Purchasing blank checks also requires paying a fee (again, depending on the bank and type of account). These fees can add up.


Additionally, paper checks need to be physically presented to the payee. For the most part, that means sending them in the mail. With postage costs rising sharply over the past few years, small businesses that mail a lot of checks are beginning to notice the cost. "Rising postage prices are a significant reason why so many businesses and consumers are turning away from paper checks for regularly recurring expenses like credit card and utility bills," Sheridan observes. "Equally, it takes a lot less time to pay these bills electronically and avoid the bother of writing a check and mailing it." Credit card and electronic payment systems can also be set up to pay bills automatically at a specified time each month, thereby eliminating the possibility that a payment would be forgotten or lost in transit, which might result in penalty fees or loss of service.

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