Preauthorized debits are "paperless" checks that allow you to receive payments from your customers electronically. They also provide a direct deposit of your customers' payments into your account electronically, all in the same transaction. Preauthorized debits are processed using the electronic funds transfer system (EFTS). This electronic system eliminates the check processing steps for both you and your bank. Once you've received the necessary authorization from your customers, your bank prepares a computerized list of your scheduled customer payments. The computerized list contains the information required to carryout the electronic transfer of the funds from your customers' accounts for deposit into your account.
Preauthorized debits offers many cash flow advantages. First, preauthorized debits 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. Since a preauthorized debit payment is made electronically, no check is required. Secondly, preauthorized debits will 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 debits also ensure that your customers never pay late since their payment is made automatically for them. Being assured that your customers never pay late makes your cash flow more predictable and easier to manage.
Preauthorized debits are often used by businesses that receive payments from
their customers at the same time and for the same amount each month.
Preauthorized debits are typically used to make mortgage and other financing
payments, insurance premiums, utility payments, and payments for many other