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June 10, 2004
Float Sinks
There is a new law that will have a profound impact on small business known as the "Check 21" banking law. For a full analysis of the pros and cons of this law for small businesses StartupJournal has a very thorough summary.
What jumped out at me is that the law changes the way checks are handled in the banking system (thanks in part to 9/11). Here is a summary from StartupJournal:
"For those unfamiliar with Check 21, the law was designed to facilitate the way banks move checks around the country. Currently some 40 billion paper checks are shuttled between banks each year by airplane and ground transportation before being cleared and returned to check writers in the mail.
"But the grounding of airplanes after the terrorist attacks of Sept. 11, 2001, underscored the need to make the nation's payment system more flexible. So rather than require banks to transport original checks between institutions in different states, Check 21 will let these lenders transfer and print electronic facsimiles of the checks instead -- otherwise known as "substitute checks" or "image-replacement documents."
"When the law takes effect Oct. 28, it could theoretically cut the time it takes a check to clear from days to hours. "
This looks like the end of check floating, which was always one of the most creative aspects of being an entrepreneur! How many days would it take for the check to the telephone company to clear? How many days would it take for our payroll all to clear? The art of float financing may soon be sunk!
Posted June 10, 2004 05:02 PM
Comments
I enjoy your blog and look forward to your comments and vision concerning entrepreneurship.
This is one post where I have to disagree.
> The art of float financing may soon be sunk!<
I have been an entrepreneur for the past 37 years and if I had a dollar for everytime I floated a check I would be millionaire. I was just lucky to win.
I don't think I would advise any entrepreneur to take a chance on floating. Floating is really check kiting. The real penalty is that if the entrepreneur loses the "the art of the float" than they risk the chance of being included in a database of fradulent check writers.
I'm eager to hear your take on my comments.
Posted by: lenny Charnoff at June 11, 2004 05:08 PM
I was not advising entrepreneurs to fraudulently float checks. But, like you said from your own experience, most entrepreneurs face issues of timing during times of tight cash flows. If I had no hope of covering the checks, I would never have, and never did, use float. That would indeed be dishonest. It was always an issue of timing. During times of tight cash flow we often would, for example, have a large account promise us that a check would be to us in a couple of days. If we knew their pattern of payment, and we could believe them we used that knowledge to pay bills that we had due. Like so much else in this age of electronically induced immediacy, we now have another part of our business mechanized and made instantaneous.
Thanks for you comment and thanks for visiting my site. I hope you will be back soon!
Jeff
Posted by: Jeff at June 12, 2004 06:03 PM
at Belmont University in Nashville, Tennessee. He consults with a variety of businesses on start-up and growth related issues, and with larger corporations on re-establishing entrepreneurial cultures within their organizations. Dr. Cornwall's current research interests include entrepreneurial finance and entrepreneurial ethics. He has authored or co-authored four books.
