Banking Tips for Creditors
A version of this article appeared in the Chartered Accountants Journal of New Zealand, 1998
I intended to write this column about a banking service called bills for collection and how it could be used to clear rubber cheques. I rang the 0800 customer service lines of BNZ and Westpac where I spoke to youthful-sounding staff who had never heard of the concept. I tried some older banking contacts. A far from exhaustive survey (Westpac and ANZ) suggests that the service no longer exists. Which is a shame. It seems as though it was seldom used and passed away unmourned. (Readers, if your bank still offers the service, feel free to let me know).
Few credit managers were aware of the service. Personally, I’d been involved in debt collection and credit management for nearly 10 years before a polytech lecturer in banking told me about it in 1995.
The idea was that if your customer bounced a cheque on you, it was possible to re-present the cheque on the understanding that your bank would present it to the debtor’s bank every day for the next week (or perhaps some other predetermined period). If on any of those days, there was enough money in the account, the cheque would clear. Obviously, there was a fee for doing this, but if the cheque was for a large enough amount, and the debtor’s business was such that there might be expected to be cash going through the account, it might be worth a gamble.
The process was set up to handle commercial bills of exchange and most banks handled it within their international department. David Tripe, Senior Lecturer in Banking at Massey University says that the service was much more relevant for international transactions and is still available for these. "There’s no intrinsic reason why banks couldn’t still do it," says Tripe, "but they weren’t making enough money out of it."
So the service is still available for bills of exchange, but not for cheques... but of course a cheque is a type of bill of exchange. Special answers are still available, but they perform a different service. In theory their value is to let you know that the cheque is good before you release your goods to the customer. BNZ’s customer service line tells me that a special answer on a local cheque will cost me $25 plus courier fees and I will get an answer the same day. For an out-of-town cheque the cost is the same but the answer will take 24 hours. The similar services at other banks will vary slightly in both price and speed. Some credit managers tell me that they have waited three days and more for a special answer. If the cheque is dishonoured, it comes back to you via the dishonour process in about five days.
It occurs to me that if I was a creditor who really wanted to use the bills for collection service for a cheque, and I had a good relationship with my bank, I would have a quiet chat with someone at my branch. I’d look for an older staff member who knows that this sort of service is possible and I’d say something like:
"I’ve got a cheque here which has bounced once. The debtor company banks at XYZ Bank in ABC town. Could you send it up there and get them to present it every day for five days at $25 a time? If there are insufficient funds then, instead of dishonouring it and sending it back, get them to hang onto it and try again the next day." If a bank makes money on a special answer at $ 25, surely it must make money on a deal like this.
While we’re on the subject of banking and payment methods I should mention the golden rule for of payment options: minimise the customer’s involvement.
Methods which can be set up now, then forgotten, are better than those which require the customer to keep remembering to do things over and over again. So an automatic payment, set up today, is better than having the customer try to remember to come into your office with cash every second Tuesday of the month for the next 36 months.
Direct debit, where the customer authorises you to take the money out of their bank account also has advantages over waiting for the cheque which is in the mail. Of course, there’s no guarantee that the money’s in the account but at least you can establish that yourself, rather than waiting for the customer to send in the promised cheque. In any case, the theory of "the hierarchy of payment" says that for most late-paying customers the problem is not that the bank won’t honour their cheques but that they would rather pay the money to someone more important than you, or they want to keep a cushion for emergencies, or they just want to keep their overdraft down.
Post-dated cheques are another very simple credit management tool that creditors should be aware of. You are in a much better position if you have the cheque in your hand, ready to be presented on the due date, rather than waiting for it to arrive. Despite what many people in seminars tell me, post-dated cheques are not illegal or invalid. And of course, many creditors will have noticed that banks do not always check the dates on cheques and they will often clear them early.
If a customer is offering to pay off an account over time, one option is to get the regular payments as post-dated cheques. Be aware of the possibility that if the company goes into liquidation in the near future, those payments may be considered to be voidable preferences. The cheques that will first catch a liquidator’s eye are those which are for nice round amounts (for example, $5,000 per month for three months) and therefore there may be some value in ensuring that these cheques are for numbers which don’t stand out quite as much.
Chartered Accountants Journal of New Zealand