If you pay a cheque into your business or personal bank account, you may know that you will not have access to that money for several days. Your bank may show you different information on your bank statement - your balance may have gone from a big debit to a smaller one, from a debit to a credit, or your credit balance will have increased; but no matter what your bank says, you should be aware that you haven't really received the money until your bank is sure that the payer's bank are happy to transfer the funds - ie that the cheque hasn't bounced.
The process of making sure the person giving you the cheque actually has enough money in their account to give you is called 'clearance'. Up until November 1996, because of something called the Bills of Exchange Act, the other person's bank (the Payer's Bank) had to have the cheque in their possession before they could allow their customer's money to be put into your account.
The process took around four days - depending forinstance on whether you paid cheques into your own branch or used another branch.
PLEASE NOTE: Clearance is only critical if you have a small amount of money in your account, and are relying on a cheque you have paid in to cover cheques you want to issue, to fund cash or other withdrawals, or to keep your account within an agreed trading limit.
YOU MUST BE CAREFUL of holiday periods - a cheque paid in late on Friday 20 December might not 'clear' until 2/3 JANUARY The table below shows the basic process:
DAY 1 You pay the cheque into your bank branch. All cheques received that day are sent to a local Processing Centre -Who send the paper on to a National Clearing Centre overnight.
DAY 2 Your bank's Clearing Centre send all the cheques received from their branches around the country to a Central Clearing House. They sort out the cheques from every bank around the country and send them back to the appropriate Clearing Centre for the Payer's bank. The Payer's bank Clearing Centre then send the cheques back to their individual branches overnight.
DAY 3 The local branch used to look at signatures, balances and, if there were sufficient funds in the account, they 'cleared' the cheque. If there were a problem, your bank would have been notified. This is the 'Value Day' for the cheque - ie your bank will include the amount of the cheque when calculating interest credits or charges on your account. However you still can't withdraw cash from your account against this cheque.
DAY 4 If the cheque has now cleared, your own branch will allow you access to your cash sometime on Day 4. This is the 'Fate Day' for the cheque - the day on which it can normally be assumed the cheque won't bounce. -Be aware that these are 'working days' - ie NOT weekends (even if your bank opens then), and not Bank Holidays.
You also may have to add 24 hours to clearance times if you are using a cash machine to get at your money.
From November/December 1996 'Day 3' is being dropped. Something called 'Truncation' of cheques is being introduced which (the banks say) will be completely transparent to the customer.
What this means is that local branches are not getting their customer's actual cheque back -there are fewer local branches anyway. The process ends at the payer's bank Clearing Centre.
The good news is that your bank could allow you to withdraw the cash value of the cheque on Day 3 - consult your local branch for information on when cash can be paid against cheques received.
The bad news may be that if you issue a cheque 'expecting' funds to be in your account by the time your bank gets the cheque back, you could be caught out quicker by the new system. Cheques MAY be cleared through your account earlier than you expect - and if this means you are overdrawn, you could be hit by 'penalty' interest charges, returned cheque charges, and daily charges while your account is over the limit.
One result of Truncation seems to be that banks will no longer check to make sure dates and signatures are correct when most cheques under £1,000 are processed. LOOK OUT for incorrect entries on your bank statements.
Don't issue cheques unless you KNOW you have the funds in your account - and CHECK YOUR STATEMENTS to make sure that 'Truncation' hasn't caught you out.
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