Post-dated cheques are a common form of payment in the UAE, whether you`re buying a car, paying rent or your B2B supplier; post-dated cheques are frequently used. A rise in using cheques for payments has occurred due to the high fees on electronic transfers. However, within the UAE there are serious factors that need to be considered when using cheques as payment. If a cheque bounces it is treated as a criminal offence with the potential of jail time, hefty fines and an overall risk to your credit score. Thus, it is pivotal to comprehend the pros and cons of using cheques, and, especially, when writing post-dated cheques.
Know Your Customer or Else - The Pros and Cons
Post-dated cheques can be your best friend or your worst enemy. A potential benefit of this payment method is how it can foster healthy and long-lasting business relationships. When you are able to rely on a supplier and it is possible to pay with post-dated cheques, with full confidence that the transaction will be honoured, you can assure a robust financial future. Furthermore, your B2B relationship will inevitably strengthen with frequent transactions via cheques, if and only if, they are honoured. Small and Medium-sized Enterprises (SMEs) often rely on post-dated cheques, thus for a sturdy cash-flow, it is essential that cheques do not bounce. The magnitude of payments via cheques in the UAE is outstanding, there were approximately 12 million cheques in circulation in the first half of 2018, with an estimate of 4% of those that bounced. Before entering into an agreement where post-dated cheques are used it would be beneficial to know your customer well in order to avoid any financial malice. It is important to understand the penalties of a bounced cheque, especially due to the fact that the charges differ from between emirates within the UAE. For example, in Dubai you would expect a fine from around AED 2,000 - AED 10,000. However, due to it being a criminal offence, penalisation of bounced cheques may result in a criminal sentence and, at minimum, detainment along with a fine. Additionally, some courts may even impose travel bans as a penalty on bounced cheques.
Therefore, post-dated cheques have many drawbacks and may be simply outdated. There are no guarantees of a cheque being honoured therefore, especially in cases of large sums, it would be highly advantageous if a due diligence investigation were to be conducted on the issuing party. An investigation of such could assess the risks of B2B arrangements and allow you to mitigate any potential risks before entering an agreement. Moreover, a cheque is only valid for 3 months from the date of issuance; this understanding creates tight timeframes upon payments. Post-dated cheques hold an array of problems that may distort the future of your business. "You must do your homework and know the other person`s financial situation, if he is good for it or not."
This quote is extracted from a case where a post-dated cheque was misused (full article
). The example concentrates on conducting B2C research, which is necessary prior to an agreement. However, it is directly applied in the same manner and perhaps, more importantly, in the case of B2B transactions, due to the fact that they usually involve larger sums with a greater risk potential.
"Do Your Homework"
This quote nicely depicts what course of action should be taken before entering a business transaction, especially in the case of post-dated cheques being issued. Cedar Rose
offers professional and meticulous investigative due diligence reports
which can assist in avoiding financial burdens and untrustworthy counterparties. Our specialised due diligence team can research the company of your choice and make sure that their reputation is robust enough for a healthy transaction. No matter the transaction, big or small, it is important to make sure that your arrangement is pre-emptively as secure as possible. Cedar Rose can provide multiple specific reports tailored to your needs. For example, a reputational due diligence report involves extensive discreetly conducted research to ascertain the local reputation of a company. This assessment may be the ultimate difference in assuring that payments via post-dated cheques are likely to be fruitfully honoured or knowing that the business or person is locally considered untrustworthy or dishonourable. Post-dated cheques are not the enemy, but the potential risks are, therefore, do your homework and mitigate them with Cedar Rose.
Stay with us for more exciting and informative articles. Just visit our newsroom here.
*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***