Delayed Disbursement

What Is a Delayed Disbursement?

Delayed disbursement is a cash management technique that involves a company deliberately making payments using checks drawn from banks that are located in remote areas. 

The strategy behind delayed disbursement is to ensure that the funds backing the check remain in the company's account for as long as possible before being drawn on and actually deposited by the recipient. That way, the company can earn a little extra interest on the money.

Key Takeaways

  • Delayed disbursement is a technique for postponing the clearing of a check, enabling funds to remain in an account for as long as possible.
  • It involves exploiting the time delay associated with processing checks from banks in remote locations.
  • In the United States, delayed disbursement has been substantially reduced through the "Check 21" Act, which authorized the use of electronic check clearing procedures.
  • Delayed disbursement remains a common hindrance in countries with developing economies.

Understanding Delayed Disbursements

Delayed disbursements are possible because commercial banks typically take longer to process checks which are drawn from banks in remote locations, often up to as many as five business days (instead of the usual three days). By exploiting this phenomenon, companies can ensure that the funds in question remain in their account for as long as possible before ultimately being paid to their vendors.

Of course, this practice can create inefficiencies throughout the economy as recipients—particularly small vendors—might struggle to cope with the delays in checks being presented for payment and the release of the funds.

Delayed disbursement is also called remote disbursement, reflecting the use of checks drawn on distant financial institutions to drag out the payment.

Check 21 and Delayed Disbursements

The Check Clearing for the 21st Century Act (Check 21), passed by Congress in 2004, sought to reduce the delayed disbursement phenomenon by removing the requirement that original paper checks be presented to a bank for payment. Instead, the Act permitted banks to process payments using electronic copies of paper checks. By so doing, it effectively undermined the ability of check issuers to exploit the delayed disbursement strategy, as electronic check processing allows checks to be cleared in a matter of hours or minutes.

Check 21 made use of digital technology to save time and money. Specifically, it gave banks and other organizations the ability to create electronic images of checks; the images are then sent to the relevant financial institutions to be processed, allowing the transfer of funds from the check writer's account to the receiving party's bank account.

Yet the impact of Check 21 extends far beyond its role in reducing delayed disbursements. After all, checks remain a widely used medium of payment in the United States, and they are particularly popular among businesses. For some, checks are advantageous because they provide a paper trail that can assist in auditing and record-keeping requirements. For others, they can provide a more cost-effective alternative to wire transfers. Such users are likely to have directly benefited from the increased efficiency caused by Check 21, particularly for those who had never relied on the delayed disbursement strategy.

Example of Delayed Disbursement

Delayed disbursement remains an economic hindrance in developing countries, where minimal infrastructure and other considerations can cause considerable waits for checks to clear, even when they've been drawn on even relatively close banks. Scholars have identified disbursement delays as a significant factor impairing the development 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. In some developing countries, the average borrower experiences disbursement delays for as many as 20 days between the approval of business loans and the receipt of their funds. Such delays inevitably form a considerable barrier to local commerce and, by extension, continued economic development at the national level.

What Is a Disbursement?

A disbursement is a cash payment made to fulfill an expense or satisfy a debt.  While it can take many forms, a disbursement basically involves the delivery of funds from one party's bank account to another. Disbursements are part of a company's cash flow and are recorded in its accounting ledgers.

What are Examples of Disbursements?

Common examples of disbursements include rent payments, payroll expenses, taxes, and insurance premiums. Along with financial obligations, disbursements can also refer to a voluntary release of funds, such as dividend payments on shares of stock.

How Long Does Bank Disbursement Take?

Bank disbursement of funds can vary greatly, depending on the method of payment presentation (i.e., paper check, wire transfer, ACH transfer, etc) and the sum involved. Disbursements can take anywhere from one day to five days. Three days is a common term for electronic transfers from one consumer's bank account to another's. Often, these are business days/week days, though—so depending on how the dates fall, a three-day disbursement might actually take five days.