Not sufficient funds definition
/What are Not Sufficient Funds?
Not sufficient funds (NSF) is a condition where a bank does not honor a check, because the checking account on which it was drawn does not contain sufficient funds. The term can also be applied to a situation where an individual attempts to make a purchase with a debit card, and there are not sufficient funds in the underlying bank account to pay for the transaction.
A not sufficient funds check is a reconciling item on a bank reconciliation, since if you deposit a check, you assume that it has cleared the bank, whereas a not sufficient funds check has not cleared the bank, thereby reducing the on-hand cash balance.
From the perspective of a collections person, a check that is rejected due to not sufficient funds is a clear indication that the person or business issuing the check has little cash on hand, and so is at risk of default. This typically results in a rapid reduction in the amount of credit allowed to this customer. Also from the collections perspective, it is customary to bill back a customer for the amount of any NSF fees incurred by the seller when it presents a customer's check to the bank that is then declared to have not sufficient funds.
As an additional note, if there is some cash in the underlying bank account, but not enough to pay for the presented check, the bank does not place a hold on the remaining cash - it is still available for other uses.
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Example of Not Sufficient Funds
Mr. Jones writes a check to Mr. Smith for $500, which Mr. Smith deposits. Upon presentation of the check, Mr. Jones' bank refuses to honor it on the grounds that there are only $300 in his checking account. This is a not sufficient funds check. Similarly, if Mr. Jones were to attempt to instead pay with a debit card and there are insufficient funds in his checking account, the transaction would be refused on the grounds that there are not sufficient funds available.
NSF Fees
The recipient of a check that is classified as NSF may be charged a processing fee by the bank at which it deposited the check. The entity that issues an NSF check is always charged a significant fee by the bank where its checking account is located. Alternatively, if a bank has an overdraft agreement with someone who writes a check that would normally be considered a not sufficient funds check, the bank can instead elect to honor the check and then charge the individual an overdraft fee.
How to Avoid a Not Sufficient Funds Situation
There are several ways to avoid a not sufficient funds condition. One option is to maintain a higher balance in the checking account than is likely to be needed, thereby greatly reducing the risk of running out of money in your account. In addition, you should reconcile the checking account very frequently, to account for any unexpected charges. This is especially necessary when you have a habit of not recording checks when they are issued. Another prevention option is to use a credit card instead of checks, thereby reducing the number of deductions from your checking account. And finally, implement an overdraft agreement with the bank (which has a fee associated with it). By entering into an overdraft agreement, the bank agrees to temporarily fund any cash shortfalls in your account, thereby eliminating all NSF situations.
The Difference Between an Overdraft and NSF Fees
In an overdraft arrangement, a bank charges a fee for accepting a check when the underlying account does not have sufficient funds in it. Conversely, the bank charges NSF fees when they return presented checks without honoring them. From the perspective of running a business, it makes sense to have an overdraft arrangement, so that presented checks will be honored by the bank. The differences between these two concepts are as follows:
Transaction outcome. With an overdraft arrangement in place, transactions are approved. When an NSF fee is charged, it means that the underlying transaction was not approved.
Impact on account. When an overdraft is triggered, you will have a negative balance in your account. When you incur an NSF fee, there is no change to the associated account balance.
Bank authorization. An overdraft fee is only charged if there is an overdraft agreement already in place. An NSF fee will be charged automatically when the funds in an account are insufficient.
Terms Similar to Not Sufficient Funds
Not sufficient funds is also known as NSF, NSF check, insufficient funds, returned check, or bounced check.