How To Rebound From A Bounced Check

No one knows how frustrating it can be to receive a “non-sufficient funds” (NSF) notice for a check better than your credit and collections department.

In some cases, collections departments encounter bad checks as part of the delay tactics used by non-paying customer to keep their ads on the air while postponing when they must pay for them. In others, it can simply be a miscalculation in cash management.

No matter what the reason for NSF, Robin Szabo, president of Szabo Associates and a former MFM board member, recommends taking quick action. He says the sooner you act, the better your chances of collecting. Szabo’s advice appears in a “Dear Expert” article in the July/August issue of The Financial Manager, MFM’s member magazine. 

While knowingly writing a bad check can result in jail time or fines, Szabo says that pursuing criminal charges is generally discouraged. Our criminal justice system is already overburdened. Instead, he suggests the following ways to solve the problem:

Contact the Customer: “One phone call might quickly prompt the customer to fix the mistake,” Szabo says. “You should ask the customer to make a bad check good by immediately paying in cash or via wire transfer.” To give the request some teeth, he recommends you let the customer know that his or her account is being placed on credit hold until the situation is resolved.

Szabo believes it is always important to request payment courteously and avoid making threats. At the same time, the situation creates the opportunity to avoid a similar problem with the same account down the road. He notes the standard practice is to close the “open-ended” credit account and change the account terms to cash in advance or certified check. If your station has moved to electronic invoicing and payment procedures, switching the customer over to automated payments via credit card may be another alternative. 

Send a Certified Letter: Szabo recommends following up on the initial phone call immediately by sending the customer a certified letter with a return-receipt request. “The letter should outline the situation and terms of repayment; reference the check number, date and amount; and cite the state’s civil and/or criminal repercussions.”

“If your state authorizes a service charge on the maker as compensation for the costs you’ve incurred, include that information as well,” he advises. “In the event that more than one state is involved, you should look at both of the states’ laws, and cite the one with the tougher statutes.”

Discontinue Contracted Services: In keeping with the initial conversation, placing the account on credit hold means pulling any of the customer’s advertising that is still on the schedule. This may seem harsh if you know the advertiser is good for the money, but seasoned collections managers will assure you that it’s the fastest way to secure payment for the outstanding balance before adding to it. There is also a good possibility that your ad sales department can find a paying customer in time to fill the inventory.

Redeposit the Check: Another tactic is to instruct your bank to put the check through again. If the NSF check doesn’t clear after a second presentment, you can ask the bank to employ its collection services. In this scenario, your bank will place the NSF check for collection by forwarding it to the maker’s bank, typically requesting between 10 and 30 days to verify funds. “The maker’s bank will then monitor the account daily, and if the funds become available in the maker’s account, the bank will collect and forward the funds to your bank for further credit to your account,” Szabo says.

Szabo cautions against returning a bounced check to a customer until the replacement payment is received and cleared. “The NSF check proves that a debt was owed and that the check was dishonored. You might be able to use it later in court as evidence of the customer’s intent to defraud.”

Hire a Collection Agency: With many credit managers wearing multiple hats, including local business managers who are also responsible for collections, there is a diminishing return on the time required for following up with an account that’s past due as a result of check fraud. If the initial actions to get the advertiser to make good on a bad check are unsuccessful, hiring a collection agency can save you time and aggravation.

Take Legal Action: “Only when all other actions for recompense are exhausted should you consider legal action,” Szabo advises. Not only can this be a time-consuming proposition, the alleged fraud needs to be extreme, “involving bad checks written for an egregiously large amount of money.”   

With this in mind, it’s important to understand the bad-check laws for your state as part of determining whether litigation is the proper course of action. Consult with your legal department or outside counsel to help you determine whether the process will make sense financially. 

Reevaluate Your Policies: The knowledge gained from a bad check experience can be helpful in improving your company’s credit policies. “Take stock of your company’s processes,” Szabo suggests. By asking, “Was this situation avoidable?” and “Are there any lessons to learn from it?” you can identify practices that will help to minimize its occurrence or impact on your operations in the future.

“Protect your company against bad checks by maintaining carefully crafted and administered credit policies that are clearly communicated to your customers,” Szabo notes. “Penalty interest and bad-check fees are critical elements for a good credit policy.”

It’s also important to request payment early enough from your cash-in-advance accounts to ensure that their checks clear prior to the date the advertising is scheduled to run. “If the bank doesn’t clear a customer’s check, you should have enough time to stop their order and resell to a more worthy customer,” Szabo recommends.

The time spent waiting for an advertiser to make good on an NSF check or to receive a replacement payment represents additional time on a business’s DSO — day sales outstanding — ratio. Since DSO is one of the ways that accountants determine the financial health of a company or industry group, putting these tips into action will reap benefits for your company and, when applied by all ad-supported media, our industry as a whole. 

I hope you find this information valuable. Please let me know if there other topics we can cover to help you improve your business’ performance and/or reach your company’s goals.

Mary M. Collins is president & CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.