Lockbox (accounts receivable)
A lockbox is a service offered by banks to businesses for the purpose of accelerating accounts receivable collection. It is a postal address, often a post office box, to which customers remit payments directly to the bank. The bank then collects the checks, deposits them into the company's account, and provides the company with detailed remittance information. This process bypasses the company's internal mailroom and accounting departments, shortening the time it takes to convert receivables into cash.
The primary benefit of a lockbox system is faster availability of funds. By reducing mail float (the time it takes for payments to arrive) and processing float (the time it takes for the company to process and deposit payments), the lockbox can significantly improve a company's cash flow.
Lockbox services are typically categorized into wholesale and retail lockboxes. Wholesale lockboxes handle a smaller volume of larger-dollar payments, often involving business-to-business (B2B) transactions. Retail lockboxes process a larger volume of lower-dollar payments, commonly associated with consumer payments such as utility bills, credit card payments, and subscription fees.
Information reporting is a crucial component of a lockbox service. Banks provide companies with detailed reports, often electronically, that include information such as the amount of each check, the customer account number, and any additional remittance details included with the payment. This information can be integrated with the company’s accounts receivable system for efficient reconciliation and customer account updates.
The cost of a lockbox service typically includes fees for setting up the account, processing each payment, and providing remittance information. Companies must weigh these costs against the benefits of accelerated cash flow to determine the economic feasibility of implementing a lockbox system. Factors to consider include the volume of payments, the average payment amount, and the company's overall cash management needs.