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. 

This is done in order to ensure that the funds backing the check remain in the company's account for as long as possible before being deposited by the recipient.

Key Takeaways

  • Delayed disbursement is a technique for delaying the receipt of cash by vendors, when paying by check.
  • It involves exploiting the time delay associated with processing checks using banks in remote locations.
  • In the United States, delayed disbursement has been substantially reduced through the introduction of new legislation authorizing the use of electronic check clearing procedures.

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. 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 vendors—particularly small vendors—might struggle to cope with these delays. The Check Clearing for the 21st Century Act (Check 21), passed by Congress in 2004, sought to reduce this 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. This 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.

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 write transfers. These 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.

Real World Example of a Delayed Disbursement

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. 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.