What is a cancelled cheque and why do I need to give one to my lender?

Cancelled cheque

With most financial transactions being done digitally nowadays, most of us have no reason to use cheques. However, when you apply for a business loan, the lender will ask you to give them a ‘cancelled cheque’ before they disburse the loan to you. Why do they do that? Let’s find out!

What is a cancelled cheque?

A cancelled cheque is the easiest way to verify you own a bank account with the lender you mentioned in your business loan application. It also helps eliminate typographical errors.

What is a cancelled cheque used for?

1. Verify your financial information Cancelled cheques help lenders verify your financial information, telling them you have a bank account in a certain bank using which you will be able to make your loan EMI payments.

2. Customer KYC Cancelled cheques are used to do customer KYC when you buy mutual funds, make stock investments, etc.

3. Opening another bank account If you want to open a Savings or a Current bank account with a new lender, you will be asked to submit a cancelled cheque in the final stages of document collection.

4. Buying an insurance policy You need to submit a cancelled cheque when purchasing any form of insurance, such as life, health, money back, etc.

5. Employee Provident Fund (EPF) withdrawal Your organisation or the EPFO require a cancelled cheque to verify your bank details when you withdraw money from your EPF account.

How do I cancel a cheque?

  1. Use a blue or a black pen.
  2. Draw two parallel lines diagonally across the cheque.
  3. Write ‘CANCELLED’ between the two parallel lines.
  4. For a cancelled cheque to be valid, do not write anything else on the cheque except “CANCELLED” and do not strike out any other details on the cheque.
  5. Do not sign a cancelled cheque.
Cancelled Cheque
Example of a Cancelled Cheque

What information can you find on a cheque?

Using this financial document, the lender gets proof of the following information:

  1. Your name
  2. Your bank account number
  3. The Indian Financial System Code (IFSC) of the bank branch
  4. The Magnetic Ink Character Recognition (MICR) code of the bank branch
  5. The name of your bank, bank branch, and location

Can a cancelled cheque be used to withdraw money?

No, a cancelled cheque cannot be used to withdraw money from your account as it has been explicitly ‘cancelled’, but it includes all the required information the lender needs to verify your information. They are also a secure way to share bank account details for people who are wary of digital payments.

Even though it cannot be used to take money from you, it still has vital information on it. So, be careful and only share it with someone you trust.  

When you apply for a business loan with CreditEnable, we check your loan eligibility upfront by doing a soft pull of your Experian credit report. Once we know you’re eligible, we tell you exactly what documents you’ll need to share with a lender to get the business loan you need.

Once the lender processes your application, they will ask you to share this document with them to verify your financial information. Don’t forget to have your cheque book handy or apply for a cheque book if you don’t already have one if you know you’re going to be applying for a business loan soon. Having all your documentation in order beforehand speeds up the loan sanction and disbursal process. Learn other tips to get your business loan application approved faster.

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