What is a lockbox?
Lockboxes are one of the oldest bank cash management systems employed. Many small businesses think lockboxes are only used by big companies that have high volumes of check transactions but in today’s banking world many banks today will customize their services and costs to fit most business needs. By definition, lockboxes are designed to allow a financial entity, typically a bank, to collect and deposit payments on behalf of a client. Information on those transactions is then transmitted electronically to the client for reconciliation of accounts. The benefits a company should experience in utilizing a lockbox are accelerated cash flow and improved accounts receivable processing efficiency.
How is a lockbox set up?
A lockbox is created by setting up a special post office box that is separate from your standard business address. Typically, the post office box location should be situated in a location nearest your customer base in order to reduce mailing time between when your customers’ submit payment and when the monies are received by your lockbox and deposited. If a company has clients throughout the country, then it may make sense to open several regional lockboxes to speed mail delivery. Special bank couriers will have access to your lockbox and will remove any received checks and deliver them to the bank on a daily basis for immediate deposit. Checks are processed and payment information is then uploaded directly into your accounts receivable cash application system, updating your receivables automatically.
What types of lockboxes are available?
There are three typical types of lockboxes currently in use:
Wholesale Lockbox – Used by companies receiving low volume, large dollar payments. This is frequently a non-automated function. The bank collects, processes and deposits receivables directly from the designated post office box, all same day. Example of a business using a wholesale lockbox: finance company.
Retail Lockbox – Provided to companies with high volume, lower dollar payments. After collecting checks from the applicable post office box, banks then use high-speed image scanning equipment to read, capture and verify remittance information via ICR and OCR technology. That data is then transmitted to the company for A/R posting. Example of a business using a retail lockbox: property management company.
Electronic Lockbox – Used by companies dealing with payment via check, credit card or Automated Clearing House credit. All remittance information is typically compiled into one file and submitted to the client for automated A/R posting.
Most bank provided lockboxes provide a standard selection of services, such as:
• Imaging of payments as they are received
• Payment data capture per customer setup instructions
• View daily images over the Internet
• Daily data entry and transmission of remittance detail
• Credit card and/or foreign check processing
• Same-day lockbox deposit total
• Detail reporting
• Delivery of back-up documents such as remittance documents, check photocopies and account maintenance items
What are the benefits of using a lockbox?
Using a lockbox can provide a number of benefits to your company. The primary benefit is the acceleration of payment and deposit by reducing float time. Utilizing a lockbox cuts down on postal delays, as payments are now no longer sent directly to a company’s home address, thus requiring sorting from standard mail. It also eliminates the middle-man process of then having to courier checks to the bank, adding to the delay in deposit time. Using a lockbox and allowing the bank to receive and deposit checks same-day can reduce payment time up to two days, providing you with a better availability of funds.
Lockboxes also aid in the efficiency of your accounts receivable department. By employing a lockbox, the cost of such a solution may be significantly less than adding staff to internally process payments. Also, by routing the check processing functionality to a lockbox option, staff can then instead focus efforts on solving other account issues such as “kick-outs” or payments that cannot be automatically applied. Additionally, a lockbox will help establish an audit trail for receivables paid by check.