Bank deposit delay zaps small business

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Dear Dr. Don,
I deposited a business check for over $30,000 in my business account in California on May 4. The check was drawn on a Chicago bank. My bank released $4,900 on May 9 and the rest on May 19. Because of the delay, I wasn’t able to make payroll. Can my bank hold the funds for this length of time?
— June Jeopardy

Dear June,
While this reply is too late to help you with your payroll issue, your question involves an important issue in banking — namely, the regulations that dictate when deposited checks become funds available in your account.

Sometimes called a “hold policy,” fund availability is regulated by the Federal Reserve Board under its Regulation CC, “Availability of Funds and Collection of Checks.”

The Fed’s guide for financial institutions, “Compliance With Regulation CC,” describes the standards in terms that are easier to understand than the regulation itself. An excerpt from the guide that addresses your situation is presented below:

Delaying Funds Availability
For certain types of deposits, Regulation CC permits financial institutions to delay, for a “reasonable period of time,” the availability of funds. A “reasonable” time period is generally defined as one additional business day (making a total of two business days) for on-us checks, five additional business days (total of seven) for local checks, and six additional business days (total of eleven) for nonlocal checks; your institution may impose longer exception holds, but you may have the burden of proving that they are “reasonable.”

If you decide to hold funds beyond the period specified in your institution’s general availability policy, you must give the customer a notice at the time of the deposit explaining why the funds are being held and when they will be available. If the deposit is not made in person to an employee of your institution or if you decide to extend the time when deposited funds will be made available after the deposit has been made, you must mail or deliver the notice to the customer not later than the first business day after the banking day on which the deposit is made.

Deposits of cash and electronic payments are not eligible for exception holds. The six types of deposits that are eligible are:

  • Large deposits (greater than $5,000) — Any amount exceeding $5,000 may be held. Your institution must make the first $5,000 of the deposit available for withdrawal according to your availability policy and the remainder within the “reasonable” time frames discussed above.

Banks know the regulation well and comply with its standards. You need to manage around the issue in running your business. A line of credit is one way to finesse funds availability. Giving your customers a discount for electronic payment is another.

Work with your banker to set up a plan that gives you more financial flexibility, but don’t expect them to make funds available early.

Read more Dr. Don columns for additional personal finance advice.