What is an NSF check?
Do your customers still pay by check? If they write one without checking their balance you could end up with a non-sufficient funds (NSF) check—that’s best avoided.
An NSF check, or non-sufficient funds check, is a check that a bank refuses to process because the account it’s drawn on doesn’t have enough money to cover the amount pledged. The bank returns the check to the issuer’s bank, which is why you might hear it called a “bounced” or “bad” check. Either way, it means the payment didn’t go through.
As a business owner, the most likely source of NSF checks is from customers who write checks unaware that their funds were too low. It’s frustrating because it delays your operations, especially if you were relying on that payment to cover other expenses.
However, you too could be the one accidentally issuing an NSF check. Running a business is hectic, and a missed deposit or unplanned withdrawal can cause a shortfall just when you need to pay a supplier.
This kind of issue doesn’t happen with electronic transfers, because those systems verify available funds before completing each transaction. The NSF problem arises only when people pay with paper checks.
Another subtle point to understand is the difference between an NSF check and an overdraft. In an overdraft, the bank allows a payment to go through, even if it causes the account to go negative. It does this because the account holder has agreed to cover such shortfalls and pay a fee.
An NSF check is different. The issuer’s bank refuses to cover the check, and the funds are never released. You—the intended recipient—remain unpaid, even when you’ve already handed over goods or services.
In this article, we’ll cover:
What does a non-sufficient funds check mean for your business?
Monetary effects
- Cash flow disruption: when you receive an NSF check from a customer you lose time notifying them and chasing them up to complete the payment. You may even have to recall a product already sent for delivery. These delays can cause cash flow problems, diverging from your business plan. That mismatch can affect your ability to pay suppliers, run payroll, or fund other obligations.
- Bank fee: your bank might charge you a fee for returning the check. That can feel unfair, since you didn’t cause the problem. But banks charge the fee because they provided the service of attempting to process the check and managing the returned item. Even though the customer is at fault, you’re the one interacting with your bank, so you get the fee. You may be able to recover that cost from the customer, but it’s not automatic.
These disruptions, even if small, can have a ripple effect. One bounced check might not seem like much, but repeated incidents can make your cash position unpredictable. That instability makes it harder to plan, meet obligations, and keep operations running smoothly. If you rely on regular payments to fund key processes, a single NSF check can create a knock-on impact that takes time and effort to resolve.
Practical effects
Beyond the financial repercussions, NSF checks create real operational challenges. They take time to fix and can strain important relationships inside and outside your business.
- Administrative burden: there’s more to it than the time required to chase up the customer. You also have to update records and monitor for a resolution. This all combines to pull you away from more productive tasks.
- Potential legal implications: in some states, knowingly writing a check without sufficient funds can carry legal consequences. If you issue one, you could face penalties. If a customer does, you might need to consider legal action to recover the payment.
- Damaged business relationships: repeated NSF issues—whether from you or your customers—can erode trust. Vendors may start requiring upfront payment, and customers may lose confidence in your billing process.
- Credit score impact: if tied to loan or credit repayments, NSF occurrences can affect your business credit rating—especially if the activity is recurrent. This makes it harder to access financing or negotiate terms.
Common reasons for NSF checks
Most people don’t knowingly write a check they can’t cover—especially in business, where reputation and relationships matter. There is very little to be gained by issuing NSF checks on purpose.
So it’s safe to say the most common cause of an NSF check is human error. A customer might simply be unaware of their account balance, forget they already made another payment, or misjudge when incoming funds are due.
However, sometimes it’s the mechanics of banking operations that interfere with how they perceive their balance. Here are three examples:
1. Delayed deposits. Funds expected to be entering the account haven’t cleared yet, leading to a temporary shortfall. This often happens when:
- A deposit is still being processed.
- A bank transfer is pending but not yet available.
- Weekends or holidays delay standard clearing times.
2. Bank errors or holds. Occasionally, banks place unexpected holds on deposits or make errors that impact the available balance.
3. Unanticipated withdrawals. Automatic payments or surprise charges can drain an account before a check clears.
Proper treatment of NSF checks in bank reconciliation
A standard part of preparing financial statements is bank reconciliation. This is when your accounting team compares each bank statement with your company’s financial records. Any differences are noted and explained, indicating when and how they will be cancelled out.
NSF checks are one of many possible causes for these differences. Follow these steps to deal with them in the appropriate manner:
1. Identify the NSF check. Your bank statement will list any checks that were returned due to insufficient funds.
2. Revise your terms and policies. Review your original agreement or payment terms with the customer. See if there are any conditions related to bounced checks or late payments, including penalties or steps for resolving disputes.
3. Adjust the cash balance. Subtract the NSF check amount from your books to match your actual bank balance.
4. Record journal entries. Reverse the original cash receipt. That means removing the payment you previously recorded, since the funds never actually arrived. Then, reinstate the accounts receivable. This shows that the customer still owes you money and that the sale remains unpaid.
5. Communicate with the issuer. Let your customer know the check was returned and discuss alternative ways they can pay you.
6. Monitor for resolution. Track the issue to make sure the payment is eventually collected and your records are updated.
7. Consider next steps if payment isn’t made. If the customer doesn’t respond or refuses to pay, get legal advice. You may need to involve a collections agency or take legal action to recover the funds.
Preventing NSF checks: Best practices
It’s hard to avoid every bounced check because you can’t control how closely your customers monitor their bank balances. But you can take steps to ensure you don’t write these checks yourself, and you can adopt a few practices that lower the risk of receiving a bad check in the first place:
Maintain accurate cash flow records
Keep your cash flow forecasts up to date. This helps you avoid writing checks you can’t cover—especially when timing is tight or you’re relying on incoming payments.
Implement internal controls
Set up processes to confirm funds are available before issuing checks. This can include automated alerts or approval steps. Approval is best handled by someone with visibility into both your cash position and upcoming obligations.
Use overdraft protection services
If available, link your checking account to overdraft protection. It can help cover a payment when your timing is off by a day or two, preventing a bounced check and potential fees.
Regularly reconcile bank statements
Reconciling your bank activity on a regular basis helps you catch discrepancies and returned checks early—before they affect your ability to pay others or create accounting errors.
Encourage electronic payments
Electronic payments only go through when funds are available, so they don’t bounce like checks can. They also clear faster and are easier to track. Offer online or card payment options to reduce your reliance on paper checks.
Educate customers
You can’t manage their bank accounts, but you can set clear payment terms and policies. Let customers know what happens if a check is returned and how they can pay more securely next time.
Reassess your customer relationships
If a customer regularly causes payment issues or is slow to respond, it may be time to reconsider how you work with them. You might decide to adjust their payment terms, limit credit, or require upfront payment for future transactions.
How bank reconciliation software can help with NSF checks
Bank reconciliation software makes it easier to catch and fix NSF checks fast. It automatically pulls in data from your bank and compares it with your accounting records. So, if a check bounces, the software flags the discrepancy right away. The software generates reconciliation statements where you can scan for anomalies across a full period.
You can then update your books with just a few clicks. Reconciliation solutions don’t fully automate the reversal, but they guide you through the process—prompting you to reverse the payment, reinstate the customer’s balance, and adjust your cash account.
This software gives you a clearer picture of your cash position at any moment—helping you save time, avoid errors, and keep your business finances steady.
Final thoughts
While NSF checks can be an unwelcome disruption, there are always proactive strategies you can implement to mitigate their impact. Proven ideas include maintaining diligent financial records, encouraging electronic payments, and leveraging tools like bank reconciliation software.
The payoff of reducing the incidence of bounced checks is greater financial stability and less time dedicated to avoiding fees or chasing payments. When your business is equipped to handle the occasional curveball, you can concentrate on growth and innovation.
