Show me the money

Waiting up to five working days for a cheque to clear is annoying enough when it comes to personal banking. The funding gap is all the more galling when it is your business that suffers thanks to an outmoded and inefficient system.

Business customers in Britain currently have to wait longer than almost all their western European counterparts for funds to pass through the clearing process. It takes at least three days for your money to be credited, whether the payment is by cheque or electronic transfer. Where cheques are used, it is more likely to be four or five days. Small firms can wait for up to 10 days for cheques to clear into their accounts, which is bad news for those with tight margins or cashflow.

The Cruikshank Report of 2000 was highly critical of the fact that banks control the networks that channel money around the economy, but little has changed since then. Earlier in the summer, Bank of England governor Mervyn King expressed his disappointment over our sluggish clearing system to assembled bankers at the Lord Mayor's Banquet in the City of London. Somewhat controversially, King asked why banks could not put the same "innovative flair" they displayed in making money to use in improving the clearing system.

There were no reports of any of the bankers skipping pudding to get started on the problem, but when you consider the fact that payment delays save banks millions of pounds in interest each year, that's hardly surprising.

The Federation of Small Businesses, a lobbying organisation that represents 185,000 of Britain's SMEs, was quick to praise King's stance. National chairman Carol Undy said: "The UK is now taking longer to clear payments than almost any other G10 country. It should, given today's technology, not take three days for a customer to clear a cheque or receive an electronic payment."

Why does clearing take so long? With cheques, there is a physical transfer as well as an electronic exchange of funds. According to the Association of Payment Clearing Services, which operates the UK's clearing systems, paper transactions are processed in a three-day cycle. On day one, the cheque is processed and the information is passed electronically through a data exchange network. The next day, the cheque is delivered to a centre where banks exchange customers' cheques. On the third day, bank staff review the cheque presented for payment and make decisions about whether to pay or return it. Settlement between the members, for the net values of the cheques exchanged between them, takes place over their Bank of England settlement accounts on day three.

In total, nearly 12m cheques are written every day and about two-thirds pass through the inter-bank clearing. Given the volume of exchanges and the physical element of a paper transaction, this can never be an instantaneous process, so a two or three-day delay is understandable.

The same cannot be said for electronic payments. While cheque writing is a dying art, BACS handles 3.5bn transactions a year. This number is to increase to 5bn by 2006. On a busy day, the system deals with 60m transactions. But why does it still take up to four days for a BACS payment to clear? Unsurprisingly, it all comes down to making money.

The Federation of Small Businesses has accused banks of stalling the process to gain extra profits, and the Consumers' Association estimates that banks make more than ?30m a year in interest from investing money sent by electronic transfer.

The good news is that the Office of Fair Trading has set up the Payment Systems Taskforce to look at the clearing issue over the next four years. With members drawn from banking, finance, consumer and business bodies, the taskforce has had two meetings this year and has the power to bring in legislation to speed up clearing if there is not an improvement in the system in the next four years.

On the electronic side, a ?75m overhaul of the transfer system has begun, but the result, says BACS, will be a shaving of just one day off the current waiting time for funds. For the moment, unless you can find someone to do business with who deals solely in hard cash - which is, perhaps, inadvisable - the only solution is to grin and bear it, and make sure your cashflow can accommodate delays.

Useful tips

· The clearing system isn't going to speed up any time soon. Until it does, you must do everything you can to ensure your cashflow can handle delays.

· Firstly, be aware of how long you may have to wait for monies to appear in your account. Give yourself at least seven working days' leeway and ensure you have sufficient extra to cover any temporary shortfall.

· Ensure you have a good relationship with your bank. An agreed overdraft facility will absorb any funding gap caused by delays in clearing.

· Having a range of clients helps, as this will stagger the payments coming into your account.

· Online banking is a useful way of tracking your cashflow to see whether funds have cleared. When looking for a business bank account, shop around using the independent financial data website moneyfacts.co.uk.