To be honest, I don’t know many things about cheques and types of cheques. I can count the number of times I’ve withdrawn from the bank by presenting cheques.
I’m not sure I know why I know so little about cheque types, but right now, but I think its because a majority of people don’t transact with it (including me!).
Now that I own a business and have a corporate account, I needed to present cheques to cash out, so I thought about learning more about cheques and write about it.
If you’re like me, if you’ve clicked this post to read, then you want to know more about cheques, add to your knowledge bank and understand types of cheques.
So, let’s get started.
What Is a Cheque
A Cheque, as defined by the Bills of Exchange Act defines a cheque as a bill of exchange drawn on a banker, and payable on demand.
In other words, a cheque is an order written by the drawer to a bank to pay on demand a specified sum of money to the person named as the payee on the cheque.
As defined by Investopedia, a cheque or check is a written, dated and signed instrument that contains an unconditional order from the drawer that directs a bank to pay a definite sum of money to a payee.
The money is drawn from a bank account, also known as a checking account or current account.
Learn more about 7 major types of bank accounts in Nigeria
So, what makes a cheque a cheque? Let’s break down cheques a little bit further by highlighting its characteristic features.
Features of a Cheque
Though there are different types of cheques, most have certain similar features and items.
- A cheque is an order to pay
- The order is unconditional
- An amount must be specified
- It must be in writing
- The account number of the drawer is stated
- The name and branch of the bank appear on the cheque
- It is addressed by one person to another
- The name of the payee must be shown on the cheque
- Stamp duty is paid on a cheque
- The amount must be clearly written in words and figures
Who are the Parties to a Cheque?
There are 3 major parties to a cheque, namely;
- Drawee and;
Let’s explain each of these one after the other.
- The drawer is the maker of the cheque
- He is holder of the current bank account
- He is the person who issues cheque directing the bank to pay a certain sum of money to a certain person or to the bearer.
- The person who signs the cheque is known as drawer.
- The drawee is the bank on which the cheque is drawn i.e the bank where the cheque will be presented for payment.
- In other words, it is the party to whom the drawer gives order to pay the amount to the person named on the cheque or his order to the bearer.
Note: When the bank follows the order and pays the amount of the cheque then the cheque is said to be honored. In case of refusal of the order, the cheque is said to be dishonored.
- The payee is the person to whom the cheque is made payable (the person to whom payment is directed to be made)
- Payee is the party who presents the cheque for payment.
- He is the person who receives money from bank.
- In other words, the person whose name is written on the cheque
- If the cheque is made payable to self, the drawer himself becomes the payee.
Now that we know the major parties to a cheque, let’s talk about the types of cheques.
8 Types of Cheques
There are basically 4 major types of cheques namely;
- Order cheque
- Bearer cheque
- Open cheque
- Crossed cheque
Now, let’s explain each of these cheque types, then I’ll share information on the remaining 4 types of cheques.
1. Order Cheque
Orde cheque is a type of cheque that is made payable to a person or firm named on it, or an order which requires the endorsement of the payee, unless he pays into his own bank account.
It is a cheque that is drawn payable to payee or to order can only be cashed by the payee. The payee can endorse it to another person and this turns into a bearer cheque.
2. Bearer Cheque
Simply put, the bearer cheque is a type of cheque that is payable to the bearer i.e whoever presents it.
This means, the cheque has a name written on it but it is payable to anyone who presents it. The indication is that this type of cheque lacks security.
3. Crossed Cheque
A crossed cheque has two transverse or parallel lines drawn on its face. It is the most secure type of cheque. It is only payable into the current account.
If the person or the firm whose name appears on it does not have a current account, he or has to endorse it to a person or firm that has current account.
Words like “& Co” or “Non negotiable” and so can be written on the cheque. All these are meant to make the cheque more secure.
When a Cheque is crossed, the following happens:
- The cheque will only be payable to a bank’s current account
- The owner of the cheque or the person whose name appears on the cheque is protected against loss of the cheque.
- The cheque is restricted toa particular bank.
- The owner of the cheque is protected against theft
- The cheque will not be payable at the counter
- In the case of fraudulent practice, it will be easy to trace the culprit
4. Open Cheque
An open cheque does not have parallel lines drawn on it. In other words, the cheque is not crossed, and not secure.
It can be cashed on a presentation at the bank on which it is drawn. It is usually used to pay customers who have no current account.
Four Other Forms of Cheques
- Stale cheque
- Post-dated cheque
- Dishonored cheque
- Bounced cheque
5. Stale Cheque
Stale cheque is a type of cheque that has been in circulation for an unreasonably long period of time, hence the date of presentation for payment has expired.
The bank will refuse to honor a cheque that is more than six months because it is considered expired.
6. Post-dated Cheque
Post-dated cheques bear a date later than the current date on which they are drawn. It is dated for some future time. Such cheques cannot be cashed before the date stated.
7. Dishonored Cheque
A dishonored cheque is one which a banker, for some reasons, has refused to pay on presentation.
Such cheques generally have some explanatory phrase written on them when stating the reason why such cheques cannot be paid or honored.
8. Bounced Cheque (Dud Cheque)
A bounced cheque is a dishonored cheque but not all dishonored cheques are bounced cheques.
When cheques are dishonored for bein stale as a result of the drawer’s death, for irregular signature, and so on, the situation can be normally reasoned.
In situations where a cheque is dishonored because the customer is not having insufficient or no money in his account, the cheque drawn by such customer is a bounced cheque.
Reasons for Dishonoring a Cheque
Why would banks (drawee) dishonor a cheque? Here are 8 reasons below:
- Insufficient funds in the account of the drawer
- Irregular signature
- A difference in figures and words
- No date on the cheque
- Alteration of the cheque: If alteration on the cheque is not signed against by the drawer, the bank will not honor it.
- Mutilation of cheque
- Stoppage of payment by the drawer
- Stale cheque
Types of Cheques Summary
There you have it, the 8 different types of cheques used at banks for cashing out money. Which do you find more secure?
You should know that there are 2 forms of crossing a crossed cheque which include: general crossing, special crossing.
Now that you’re informed about the types of cheques in Nigeria, would you consider using this method of payment, at least for the experience? Lets have your comment.