In the course of our business and commercial litigation work, we are often asked questions about business banking such as provisional credit.  The answers are often different from what you might expect.

Consider this Provisional Credit Scenario

“My small business received a large check from a new customer and deposited it, and the next day our online statement showed that the deposited amount was in our account.  We wrote checks against that deposit.  Over a week later I got a letter from our bank saying that the check we deposited was returned NSF, and they reversed the deposit.  The checks we wrote will now bounce.

I took a screenshot of the online account and can prove the bank credited us with the deposit before we wrote any checks on it. Can the bank do this, after I relied on their online record of the deposit and wrote checks against it?”

Understanding Provisional Credit

This may sound unfair, but the bank is very likely within its rights here.  Depending on the circumstances and within their discretion, your bank may put a hold on a deposited check and not make those funds available to you until the check clears the bank that it came from.

But your bank may also make those funds available immediately and show them as part of your account balance.  This is called a “provisional credit”.

A provisional credit is one that gives the customer immediate access to the funds deposited, but is conditioned on the deposited check clearing the bank.  If it doesn’t, your bank can reverse the deposit and create potential NSF problems for your own checks.  Worse, you may not find out about it until you get a letter in the mail, often a week or more after the fact.

The bank’s position is simple.  It is providing immediate access to the funds as a courtesy to you, its customer, but you are the one dealing with the party who wrote the check, and you are in a better position than the bank to determine whether the check is valid.  This is usually spelled out in your written deposit agreement.  The loss, if there is one, therefore falls on you, the customer.

A provisional credit is one that gives the customer immediate access to the funds deposited, but is conditioned on the deposited check clearing the bank.  If it doesn’t, your bank can reverse the deposit and create potential NSF problems for your own checks.

How can I prevent this from happening?

You may think that if you receive a check and deposit it, you can call your bank a day or two later and ask for confirmation that the check has cleared.  Don’t count on getting it.  Banks don’t want the legal exposure if something goes wrong, and understandably so.  You may get advice like “wait ten business days to be sure.” 

Certified checks or cashier’s checks, guaranteed by the bank issuing them, provide added protection compared to standard personal checks.   But they are not immune from sophisticated counterfeiting.  If you receive one of these, it’s a good idea to contact the bank that issued it to make sure it’s legit.

A wire or email transfer directly to your account is often the safest and fastest way to ensure that the funds received in your account are ‘good’.  You will be able to confirm with your bank on the same day or within 24 hours whether the money has been received, and once receipt is confirmed you should be protected. 

Be Proactive

Finally, make sure you talk to your bank about ways in which you can better protect yourself.  You may be able to sign up for email, text or other electronic notifications that give you faster notice of issues or problems, while you still have time to do something about it. 

And always, always check your account and reconcile your account regularly so you can stay on top of it.  If something goes wrong, your bank will usually do what it can to help you but it will also have an array of legal protections that will make recourse difficult or impossible.  Be vigilant and protect yourself.