What Are Bankable Funds?

The term "bankable funds" refers to methods of payment that are accepted by banks. Examples of bankable funds include cash, money orders, and cashier's checks. In order to reduce their risk of fraud, retailers and other organizations that accept payment directly from customers typically request that payments be made in forms that can be redeemed by the bank.

Key Takeaways

  • Bankable funds are methods of payment that are readily accepted by merchants and banks.
  • They generally offer low risks of fraud and can be converted into cash on short notice, which is why they are widely accepted by merchants.
  • Today, the range of bankable funds is increasing due to technological innovations allowing owners of traditionally non-bankable assets to borrow easily against the value of their holdings.
  • Common types of bankable funds include cash, money orders, and cashier's checks.
  • Assets that are not readily convertible into cash are not considered bankable funds, such as precious metals or real-estate holdings.
  • Bankability may also refer to the viability of infrastructure projects after commercial banks have assessed their viability and risk profiles.

Understanding Bankable Funds

Bankable funds are methods of payment that can be readily converted into cash and deposited into a bank. As such, the purest example of bankable funds would be cash, while other instruments, such as cashier's checks, are also bankable.

Other types of assets, such as precious metals, are not bankable funds. This is not because the assets are not deemed valuable; rather, it is simply because converting precious metals into cash requires time and is subject to uncertainties surrounding the fluctuating value of the asset. Similarly, shares in publicly traded stock are not considered bankable funds, despite the fact that they are of undeniable value.

In some cases, the distinction between bankable funds and other assets can become blurred due to new technological innovations. For instance, while shares in stock are not considered bankable in themselves, some brokerage firms now offer credit cards that allow the stockholder to make everyday transactions at retailers using the value of their stock portfolio as collateral. In this instance, the credit extended through the card would be considered bankable from the perspective of the retailer.

Similar innovations have taken place in other asset classes. For instance, some companies have begun offering debit and credit cards backed by precious metals stored in vaults on behalf of the owner. Other such services have also been created to enable owners of cryptocurrencies, such as Bitcoin, to conduct transactions using credit or cash backed by their crypto assets.

Types of Bankable Funds

Common examples of bankable funds include checks and money orders. Merchants may accept checks as bankable funds because they are relatively easy to convert to cash, especially when check conversion technology is employed. However, it can take a few days to convert a personal check to bankable funds, so some merchants will not accept them. Some merchants may also refuse personal checks out of concern that the checks might be fraudulent or they would request a certified check.

Money orders and cashier's checks are also considered bankable funds because they are fairly easy to convert to cash. However, just as with personal checks, most banks will place a hold on a money order until it clears. The best way to convert a money order to cash is to cash it at the issuing institution, in which case the funds can then be immediately banked.

Infrastructure Bankability

"Bankability" also refers to infrastructure projects. In this usage, the term refers to the viability of specific infrastructure projects and the risks involved with them. It is the role of commercial banks to assess the value and risks of an infrastructure project, its bankability, and then provide the capital to fund the project.

When assessing the bankability of a project, banks are concerned with the overall costs, timelines, parties involved, return on the investment, and any other factors that would make up the risk profile. If a bank determines an infrastructure project to be sufficiently bankable, they will go ahead and provide the financing needed. The bankability of a project is determined early on, usually in the project development stage.