This article is part of a larger series on Business Banking.
A returned item fee, also known as a nonsufficient funds (NSF) fee, is what your financial institution charges when it declines or returns a transaction due to insufficient funds. The average fee ranges from $27 to $40 per returned item.
Returned items can financially damage your business, hurt your business’s reputation, and affect future dealings. If you want to maintain a good credit standing and save on unnecessary costs, it’s best to learn how to avoid returned item fees as well as what a returned item fee means for your business.
How Returned Item Fees Work
When your bank attempts to clear a check or an electronic payment through your account and your balance doesn’t have enough funds to cover it, the transaction will be declined or returned. If it was a check transaction, it would bounce and be considered a bad check. The bank will then charge you a returned item fee. Returned items can also occur if a payment or check is presented to a closed or frozen account.
Returned Item Fee Example
Let’s say you wrote a check to a supplier amounting to $1,000. However, you forgot that your checking account balance was only $800, and you don’t have overdraft protection. When your supplier deposits the check to their bank, it’ll be returned due to insufficient funds. The bank will then charge you a returned item fee as a penalty for writing checks against a nonsufficient balance.
Returned Item Fee vs Overdraft Fee
A returned item fee is charged when the bank declines a financial transaction due to insufficient funds, resulting in bad checks or returned payments. Meanwhile, an overdraft fee is charged when your bank approves a transaction against a nonsufficient balance and covers the costs temporarily, resulting in a negative account balance.
How Much Do Returned Item Fees Cost?
The average returned item fee in the United States ranges from $27 to $40 per returned item due to insufficient funds, but this amount can vary from bank to bank. If you write multiple checks that your balance cannot cover, you’ll be charged a returned item fee per check presented.
Waiving Returned Item Fees:
If you get a returned item fee, you can contact your bank to see if it’ll waive the fee. If it’s the first time that you have had an NSF fee and you’re a customer with good credit standing, there’s a chance the bank will waive the fee.
Impacts of Returned Item Fees on Your Business
If you have numerous declined transactions, returned item fees can add up easily. Some banks charge multiple returned item fees in a day if several items are returned. For example, Chase’s business checking can charge up to six insufficient funds fees per day at $34 each, so that could cost you up to $204 per day. Bank of America can charge up to four per day at $35 each or up to $140 per day.
Declined transactions often result in late payments, which can hurt your relationship with clients, suppliers, or vendors. If your business builds a reputation for writing bad checks, other businesses may refuse to work with you in the future.
If your business has too many returned items, your bank may close your account completely. Accounts closed due to returned item fees can often be turned over for debt collection, which could end up damaging your credit.
Future Banking Activities
Although bounced and returned checks don’t have a direct impact on your credit score, having negative items on your banking history may affect your ChexSystems report, a report that many US banks use to analyze your business’s level of risk. If you have a negative ChexSystems report, banks may refuse to let you open an account.
How To Avoid Returned Item Fees
- Monitor your account regularly: To ensure that you have enough funds in your account to cover all your check transactions, it’s necessary to keep track of your balance regularly. Online and mobile banking lets you check your account balances on the go.
- Track your financial transactions: Monitor your check transactions and automatic payments and compare them with your account balance. Be sure to have sufficient balance in your account before writing checks and before your automatic payments are due.
- Sign up for balance alerts: Some banks allow you to set up email or mobile text alerts that notify you when your account falls below a certain threshold. Balance alerts may also help you spot suspicious charges.
- Deposit extra funds in your account: Create a buffer against insufficient funds by setting a minimum target balance. Deposit funds regularly to keep your account balance within this target threshold. Whenever your balance falls below your target, make sure to replenish the amount as soon as possible.
- Sign up for overdraft protection: Most banks let you enroll in overdraft protection when you open a business bank account. With overdraft protection, your bank transfers funds from your savings account, line of credit, or credit card to cover any transaction against insufficient funds. While overdraft protection can help you avoid incurring returned item fees and hurting your business relationships, you usually need to pay fees for overdraft protection services.
- Choose a bank without NSF fees: Some providers don’t charge NSF fees. Bluevine, for example, declines transactions against insufficient funds but charges no fees for the mistake.
What To Do If You Write a Bad Check
Although you should do your best to avoid returned item fees, it’s helpful to know what to do in the event that you accidentally write a bad check. Here are steps you can take to remedy the situation or prevent further damage:
- Contact the payee of the check: As soon as you find out that your check has bounced, it’s important to contact the recipient right away to apologize. This way, you can avoid damaging your business relationship with the check recipient.
- Pay your debt: Make payment arrangements with the recipient and pay your debt as soon as possible, including the returned check fee, if applicable.
- Pay the returned item fees: Make sure to pay the fees charged by the bank. If you have a good business relationship with your bank, you can also try to request a refund.
- Ask for receipts or acknowledgment of your payments: Once your balance is paid, ask for receipts from the check payee. Additionally, ask your bank for a receipt for the paid returned item fees.
- Monitor your account and financial transactions: To prevent repeating the mistake, monitor your account and all your financial transactions on a regular basis.
Incurring returned item fees repeatedly can damage your business finances, reputation, and banking history. To avoid writing bad checks and being charged NSF fees, find time to monitor your account balances to ensure that you have enough funds in your account to cover all expenses.