This post is the second in the banking series.

A financial institution’s policy of holding funds is often a source of customer complaints because the rules and reasons are often poorly understood.

New accounts of all kinds are usually subject to the institution’s hold funds policy unless you are a well established client. The bank will prevent access to most Canadian cheque deposits for at least 3 days and up to as much as 7 days. A teller obviously won’t put a hold on a cash deposit but he or she will put a hold on a deposit containing cheques. This means that if you deposit cheques with a teller or anything with an automated banking machine (ABM), you will not have access to the funds for a least 3 days. Cash deposited through an ABM will be held because the machine has no way of verifying that the envelope actually contains anything.

The bank does this to protect itself against fraud by new account holders. This allows cheques that have been deposited time to clear through the payment system. Any forged or fraudulent cheques that were deposited will usually charge back to the depositor’s account during the hold period and bank staff will be alerted to the activity.

Cheques drawn on foreign banks will have very long hold periods (U.S. cheques are held for about 30 days) because the payment clearing system between countries is often very slow. Foreign currency cheques drawn on Canadian banks will have longer hold periods as well, from 10 to 20 days.

Clients who have established a relationship with their financial institution may have their hold limits increased. For example, a long time client may have the first $5,000 of a deposit available to him but any deposit in excess of this amount will be held. This gives the client instant access to his funds but limits a potential fraud to $5,000.

Bouncing too many cheques or other suspicions activity will result in the bank putting a “hold all funds” back in place. This is one good reason among many to keep track of your account balance to make sure you have the funds available before writing a cheque.

Bank products and policies are generally poorly understood. Bank employees have a heavy workload and they often don’t take the time to fully explain things. Business people are afraid to ask questions because it will reveal what they don’t know. This leads to frustration for everyone. This series on banking will help to alleviate this frustration.

Business accounts basically come in three flavours; operating accounts, savings accounts and U.S. dollar accounts. There are many variations of these three types as banks and credit unions add features to try to gain competitive advantage but ultimately beneath the window dressing, it’s just these three basic accounts.

Operating accounts are for the day to day activities of the businesses. Business owners can write cheques on these accounts or use a debit card to make purchases, much like a personal bank account. Business accounts are quite different though when it comes to fees charged to the account holder.

These accounts will have often have a flat month fee plus fees for each transaction. Business accounts are charged for deposits based on the content of the deposit. For example, one bank is charging $1.80 for every $1,000 in paper cash deposited and $1.80 for every $100 in coins deposited. There is also an approximately $0.16 fee for each cheque contained in a deposit. Cheques & deposit books are more expensive than those for personal accounts. Night deposit will cost extra as will the disposable plastic bags for the drop. Some institutions may offer a bundled price monthly price for a certain level of transactions.

Business savings accounts generally don’t have chequing privileges but most institutions allow a couple of free transfers to an operating account each month. The rate of interest paid on these accounts is usually tiered so that larger balances earn more interest. For example, it might take a $100,000 balance to earn 1%. As a rule, these accounts aren’t worthwhile and surplus cash should be used to buy short term investments instead.

Foreign currency accounts are available from most institutions. The most common is the U.S. dollar account because of the large number of Canadian companies that export down south. These accounts work much like operating accounts but the fee structure might be slightly higher. Financial institutions will take a commission whenever one currency is changed to another. This means that the exchange rate you see on the news won’t be the rate you will be getting at the bank. The commission varies according to the amount of money being exchanged. A transfer between an U.S. dollar account and an normal operating account will trigger these commissions.

The next post in this series will deal with the rules governing these accounts.