This document explains how postdated checks are used for payment.
A postdated check is a check with a date indicating when it may be deposited. Postdated checks are commonly used in Asia and the Gulf market. They are also quite common in the USA.
The purpose of a postdated check is to extend credit to the check writer. In that respect the postdated check is a promissory note, similar to a draft.
Using postdated checks is controlled by national laws and customs and company policy.
Debts are paid by deposit of a postdated check on or after a certain date.
Use the result to monitor the company's cash flow.
The following files are updated:
Checks of type 1 are saved with information category number 226, displaying all invoices connected to each check number. Value type 42 (customer risk not cancelled) is updated in 'Accounts Receivable. Display Balances' (ARS225).
If the check is of type 2, the following values must be defined as well:
This basic workflow is very similar to the workflow for regular checks or drafts:
Basically, you can issue a postdated check whenever you wish to guarantee the seller that money for purchased goods or services will be available on and after a certain date in the future.
The advantages of using postdated checks are:
Release the goods or perform the service in reliance of the check writer's promise to pay at some later date rather than in reliance of the check's negotiability.
The main advantages are:
The payment terms with the customer determine whether postdated checks should be accepted.
Postdated checks are also used as a quite common payment method in the USA. There are, however, some statutes that prohibit or limit the use of such a check.
In most states, the rule is that a postdated check may be paid before its valid deposit date so long the check is otherwise properly payable. To prevent this from happening, the customer is required to give the bank a notice of the postdating in advance, describing the check with reasonable certainty. The bank charges a processing fee for identifying and postponing the cashing of the check.
If the bank in spite of that would charge against the account of the customer, it is liable for any damages sustained by the check writer, including any damages incurred as a result of the dishonor of any subsequent checks.
One reason for this is that banks are processing large numbers of checks each day. For technical and human reasons, banks generally do not check the date on a check before they pay it.
As seen above, the two main risk factors in managing postdated checks are:
The Uniform Commercial Code (UCC) defines a check as "a draft drawn on a bank and payable on demand." Since a postdated check is not payable on demand, it has generally been held by most states that the giving of a postdated check is not within the scope of the bad check laws.
Debt collectors used by the company may not deposit a postdated check prematurely to cover outstanding customer debts.
Payday lending is a fast-growing industry in the USA. A payday loan is a short-term cash advance on a postdated check. It is a very high-interest-rate loan, typically two weeks in duration. Borrowers who are granted a loan write a check postdated to the end of the loan period and literally or figuratively walk out with the cash. At the end of the term, they have the option of continuing the loan for an additional period by paying the interest. The loan can be renewed as often as the borrower likes.
M3 supports the processing of two types of postdated checks: Definite and preliminary.
For both types of checks, the date of the check is most likely identical to the due date of the original invoice. If not, the customer should be contacted and asked to send a new check or the due date of the invoice be revised. This facilitates the routines for customer debt management and credit monitoring.
The check is treated very similarly to an accepted draft. In fact, you enter it as a payment class 4 document, that is, a bill of exchange/draft. The check is recorded and allocated to invoice. The invoice is closed and accounting transactions are created. Then it is remitted to the bank for collection on the due date. When the bank has confirmed the collection, the check is reconciled as paid.
This type is primarily used in Asia; it is not considered legal in all countries. You record the check preliminarily but no transactions are created. It can be allocated to invoice directly or afterwards. Some time before the valid deposit date, you select the checks for which account entries should be created and update the ledgers. You do this in a separate program, 'Postdated Check. Create Account Entries' (ARS320). After that you remit the check to the bank for collection or collect it manually.
The main difference between the two types is that by using preliminary checks you can record the check without updating your ledgers with new transactions – the invoice remains open. For this type of postdated checks, you can control when the customer risk should be cancelled (refer to Before Starting).
The payment forecast is automatically updated for the payer in 'AR Payment Forecast/Age Distribution. Display' (ARS260) when the preliminary check is entered, although no account entries are created. Since the invoice is still open, however, it would still be included as open in 'AR Statement of Account. Open' (ARS140) until the account entries are created.
Any cash flow plans created in 'Cash Flow Plan. Open' (CFS200) are not updated until the checks are processed in (ARS320).
In both cases, checks are entered either in 'Payment Document. Enter' (ARS105) or 'Payment Received. Record' (ARS110). The difference is that when using (ARS105) you can choose not to allocate the check to specific invoice records. There a separate list of entered payment documents is printed as well when finishing the entry.
Since definite postdated checks are processed like drafts, you can review them in 'Customer Draft. Display' (ARS280). The same statuses are used as for drafts.
Preliminary postdated checks are displayed in the checkbook, 'Customer Check. Display' (ARS430), depending on the sorting order and status selected.
Sorting order 3 enables you to see all preliminary checks for which account entries are not created, with the following statuses:
10 = Not allocated to invoice
20 = Preliminary allocated to invoice
40 = Included in an accounts allocation proposal in (ARS320).