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FAQs About Lockbox Banking

While e-commerce payment gateways are replacing checks, lockbox services remain helpful for businesses that receive high volumes of payments regularly. They enable them to process payments more efficiently and update accounting systems faster. The cost of maintaining an accounts receivable department is expensive. Shifting the responsibility to a lockbox processor cuts costs by eliminating fixed expenses.

1. What is a Lockbox?

An exclusive post office box called a lockbox is what businesses use to receive actual cheese from clients. When a company sets up a lockbox account with its bank, the bank becomes the collection point for all incoming check payments. The bank then processes the payments using electronic data transmissions, more accessible than handling each charge by hand and reconciling accounts daily.

Additionally, the use of lockbox services can speed up the crediting of payments to an organization’s accounts receivable system, which can increase cash flow. However, this type of banking service can also be costly. In addition to a setup fee and recurring monthly payments, many banks charge a per-transaction or per-check processing rate.

The costs of using a lockbox can make it prohibitive for small businesses that receive a low volume of checks or those that can handle their collection and deposit of paper payments. This service is typically best for more extensive, mature organizations that process many or extensive value checks.

For example, property management companies often use a lockbox to receive homeowner’s association fees from their members. The costs are then deposited into the property management company’s bank account and credited to the homeowners’ associations’ accounts, which improves their cash flow and helps them avoid late fees from association members.

2. How Does It Work?

Companies send them in-mail customer payments and remittance documents to a secure bank lockbox. The bank then processes these payments and deposits them in a business’s bank account, updating its accounts receivable systems with these new records. Companies can choose between wholesale or retail lockbox services based on their needs.

Retail lockboxes are more suited for consumer-facing businesses, while wholesale solutions benefit B2B merchants. A company can save time and money by outsourcing its accounts receivable management to the bank. This service reduces the cost of maintaining an internal accounts receivable department, including hiring and training personnel, purchasing software, and paying overhead expenses like rent, electricity, security, etc.

Additionally, the banks that offer lockbox banking services can provide customers with customized reports in a format that suits their workflows. It eliminates the need for an accounting clerk to prepare and generate these periodic reports manually, further reducing a company’s costs.

Another advantage of a lockbox service is that it significantly speeds up payment collections and cash conversion. This benefit results from reducing what’s known as “mail float”—the time it takes for check payments to travel from payers to the payee’s accounts receivable departments. This time lag can cost businesses interest income and raise their DSO.

3. How Much Does It Cost?

In addition to the monthly service fee, banks typically charge a per-transaction fee for every check they process through your lockbox. It can add up quickly, especially if you receive thousands of monthly payments. Easier reconciliation: The bank’s delivery of all payment information (including remittance advice) in one file makes it easier for your accounting department to reconcile and apply for payments.

It saves staff time, thus more time fixing errors, and lowers the number of manual operations introducing human error into your company’s accounting. Better data security: Because the bank handles the incoming checks, they maintain backup records in case of an information breach. It gives your company peace of mind that the information is safe and secure.

4. Faster Processing

The fact that the bank receives and scans the physical checks directly means they can process them more quickly than your own back office, boosting your cash flow. Depending on your chosen plan, your business can even have payments processed multiple times daily. Consider that you have consumers who are in different locations.

In that case, the bank can also set up lockboxes in those locations to speed up processing and reduce “mail float”—the amount of time that payments sit in the mail before arriving at your company’s address. It can be beneficial for companies that need to ship goods or services to customers in a short window of time.

5. Which Banks Offer Lockbox Services?

Whether you have an enormous volume of payments from customers nationwide or just a few checks daily, your business can use a lockbox to process these items faster. You save on labor costs and the need for accounts payable employees to manually match each payment to an open invoice. Typically, banks offer either retail or wholesale lockbox services for businesses.

A key feature of both is that the bank will establish a unique mailing address, called a “post office box,” to receive the company’s payments and mail. The money is then placed into your company’s account when the bank ferries the day’s payments and remittance paperwork to its processing center, the payment information is recorded and sent to your accounting department, and the cash is received.

In addition, many commercial banking companies provide a service to integrate the information in your bank statements with your accounting software. It eliminates the need for your accounting department to reconcile the two data files, a common source of errors in your general ledger. The banks that offer this service charge a setup fee and a recurrent monthly fee. However, the time saved by your accounting department means you can offset these fees in less than a year.

Alex Carey
Alex Carey is working as a Content Marketing Specialist at The Technoverts. He loves to write and share content related to the latest technical research. He is also a soccer lover.

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