Delayed Disbursement

Delayed disbursement is a cash management technique that involves a company paying vendors and/or other creditors by checks drawn on banks located in remote areas. Commercial banks will typically delay the availability of funds to the depositor of such checks for up to five days as they await payment from the paying bank. Companies use this technique as a way to maximize disbursement float, a term that describes a decrease in book cash while delaying a change in bank cash.

The Check Clearing for the 21st Century Act (Check 21) sought to reduce or eliminate delayed disbursement by removing the requirement that original paper checks be presented to a bank for payment. Instead, electronic check conversion can be used, so that electronic copies of paper checks can be presented instead. This speeds the check-clearing process, and means that issuers of checks may no longer be able to count on disbursement delays, since electronic processing means that checks may be cleared in a matter of hours or minutes.

However, companies remain the largest users of paper checks in the U.S. Total check volume decreased 18 percent between 2003 and 2006, but the value of payments made by check increased in that period from $39.3 trillion to $41.7 trillion, suggesting that corporate account holders are still issuing most checks. Small businesses especially prefer to use checks because they are easy to keep track of for auditing and record-keeping purposes, as well as being easy and cheap to issue. For these reasons, corporations may still choose to use delayed disbursement to take advantage of float, by having checks drafted by a bank in a location far away from that of the payee.

Delayed disbursement remains an economic hindrance in developing countries, where minimal infrastructure and other considerations can cause considerable disbursement delays for checks drawn on even relatively close banks. Scholars have identified disbursement delays as a significant factor impairing the developing of new businesses in many African nations, for example. In many cases, entrepreneurs may find themselves making payments on a business loan before the loan amount has even been disbursed, due to delayed disbursement in that region. The average borrower experiences a disbursement delay of about 20 days between approval for a business loan and receipt of the funds.