Uncollected funds definition
/What are Uncollected Funds?
Uncollected funds are checks deposited with the payee's bank that have not yet been paid by the bank on which the checks were drawn. The payee’s bank must ensure that the funds have been received before it can release them to the payee. In the meantime, the cash is unavailable for use until the funds have been collected by the payee's bank.
When a payee deposits a large check with its bank, the bank may release a portion of the funds for immediate use, if the payee has a long-term relationship with the bank. If not, then the entire amount of the check will be unavailable for use until the payee’s bank receives the funds.
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Uncollected Funds vs. Insufficient Funds
Uncollected funds mean that the cash associated with a check payment has not yet been received by the payee’s bank. This is not the case with insufficient funds, where the payer entity does not have sufficient cash in its bank account to cover the amount of the check. In the latter case, the check will be designated as having bounced, and the payor will be charged a fee.
Not Sufficient Funds Transactions
It is possible that the payer's bank account does not contain sufficient cash to pay for a presented check. If so, the uncollected funds amount transitions to a not sufficient funds (NSF) transaction, for which the payee receives no cash.
Advantages of Uncollected Funds
Though payees would like to have immediate use of the cash associated with check payments, there is a distinct advantage to the uncollected funds concept. In essence, it protects banks from the losses associated with fraudulent check payments. Without it, a person could write a bad check payable to himself, cash it at a different bank, and get paid in cash at once - leaving the bank to absorb the loss.
Disadvantages of Uncollected Funds
The main disadvantage of the uncollected funds concept is that payees in need of cash do not have access to it until several days after they have cashed a check. This can put a substantial financial burden on those payees who have limited financial resources. A further issue is the uncertainty associated with when the cash will be made available to them, since check clearing times can vary. In many cases, several business days may pass before a payee has access to the funds associated with a check payment.