Preauthorized checks are checks that you write on behalf of your customers to pay the amount owed to you. No action is required on the part of your customers if you use preauthorized checks. Preauthorized checks don't even need your customers' signatures. On the dates your customers' accounts are due, either you or your bank will write the checks for the amounts due, and then deposit them into your bank account.
Since signatures are not required on the preauthorized checks, you must have your customers' approval prior to withdrawing the funds from their checking accounts. This approval is granted by a signed agreement between you and your customers that allows the preauthorized checks to be used and drawn against their accounts. To your customers, the preauthorized check is just like any other check. The preauthorized check will appear on their bank statements like any other handwritten check. A preauthorized check should also be included as a canceled check along with the rest of their checks.
Preauthorized checks offer many cash flow advantages to you. First, preauthorized checks will reduce the payment and deposit portion of your cash conversion period by eliminating the need for your customers to write and mail checks. A typical customer will wait until the payment due date before dropping their check in the mail. Preauthorized checks allow you to deposit your customers' checks on the due date of the payment, instead of having to wait for it in the mail. Secondly, preauthorized checks eliminate the risk of any potential postal service delays in delivering your customers' payments. Depending on the locations of your customers, not having to rely on the postal service for the delivery of their payments can reduce your cash conversion period by one to three days. Finally, preauthorized checks also ensure that your customers never pay late since you write the check for them on the date their payment is due. Being assured that your customers never pay late makes your cash flow more predictable and easier to manage.
Preauthorized checks are often used by businesses that receive payments from
their customers at the same time and for the same amount each month.
Preauthorized checks are typically used to pay mortgage and other financing
obligations, insurance premiums, utility payments, and payments for many other