Cleared Funds: Definition, How They Work, Importance, and Example

By
Adam Hayes
Full Bio

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated October 31, 2020
Reviewed by Charles Potters

What Are Cleared Funds?

Cleared funds are the cash balances in an account that are able to be immediately withdrawn or used in financial transactions. Until funds are considered to be cleared funds they are considered to be pending, and investors or customers will be unable to conduct transactions with them.

Key Takeaways

  • Cleared funds are money that has been fully transferred from one account to another, for example after depositing a check.
  • Cleared fund are available for immediate withdrawal or use.
  • Payments and money transfers take time to clear, especially if the originator uses a different bank than the receiver of the funds.

Cleared Funds Explained

When cash or checks are deposited into an account, either as an account funding transaction or as the result of the sale of a security, it may take several business days until the financial institution is able to make all of the funds available for withdrawal or trading. A check clears when funds are moved from the check writer's bank to the bank of the person depositing the check that was written. If the check writer and depositor use the same bank, this can potentially happen on the same day.

When a person receives a check and deposits it, the bank receiving the deposit makes a request to the bank that houses the account the check was written from. Intermediary banks, clearinghouses, or the Federal Reserve may assist in the transaction. This can take varying amounts of time. Often, larger deposits may require a longer period of time to clear than smaller ones, especially if the size of the deposit requires a financial institution to comply with government regulations.

2 days

It typically takes about two business days for a deposited check to clear, and about five business days for the bank to receive the funds. Electronic transfers may clear in fewer days.

Cleared Funds vs. Available Funds

Available funds are not the same as cleared funds. Banks are required by law to make a certain portion of deposits available to the depositor either immediately or within a few days of the deposit. However, that does not mean that the money has actually been moved from the check writer's account and cleared. If available funds are withdrawn from the account and the deposited check does not actually clear, the amount of the check will be withdrawn from the depositor's account possibly resulting in a negative balance or a bounced check due to insufficient funds.