What Is a Lockbox Payment?

This Service Helps Companies Streamline Their Payment Processes

Cash box tied up with chain and padlock, elevated view

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Lockbox payments are a way for companies to streamline the way they accept money from customers and get access to the cash. When a company uses a lockbox service, they typically set up a special P.O. box for their customers to send payments to; then the bank collects those payments, deposits the cash, and updates the company on their transactions.

How Lockbox Payments Work

Say you receive a bill from your electric company. It arrives in the mail with a remittance slip. You fill out the slip, enclose your check, and mail it off to a post office box in a nearby city. That's your electric company's lockbox.

A company can use more than one lockbox—for example, one in each region of the country in which they do business. Since customer payments can be mailed to the closest lockbox instead of across the country, it decreases mail time, speeding up the company's access to its funds.

When your payment arrives at the lockbox, it's collected by the bank along with potentially many other payments, possibly up to several times a day. The bank may scan your remittance slip and check, enabling the company to receive your information in digital format. The money is deposited and the company is notified of the payment to their account.

Benefits to Customers

Remitting payment to a lockbox is an easy, simple way for a customer to send a check for payment or deposit. For the price of a stamp, their payment is delivered reliably and their checks clear quickly. Lockbox payments are credited to the customer's account faster because of how frequently the bank collects and deposits payments.

Benefits to Companies

You've probably filed lockbox payments as a consumer. But consider them for your business, too. Lockbox services offer speed and efficiency, getting money into your bank account faster than you’d be able to do it yourself.

Mail may be delivered to a lockbox location multiple times per day, instead of the once-daily visit your office may be accustomed to—offering more opportunities to capture payments and make deposits to your account.

Lockbox payments also reduce “mail float,” or the time between a customer mailing the check and your company receiving it. This can help you maximize all of the money that's available to you.

Disadvantages of Lockbox Payments

While they do speed up processing time, reduce mail float, and provide quicker access to funds, there are still some disadvantages to lockbox payments. For one, though they're faster than accepting checks at the office, they're still slow—slower than other electronic means of transfer. Payments must still travel through the mail and be processed before they're available to accounts receivable.

Also, there is somewhat of a security risk in using lockbox payments. If your bank relies on manual data entry for processing lockbox payments, there is a risk of fraud, whether on the part of an unscrupulous bank clerk, an offshore contractor, or a customer writing a fraudulent check. Plus, the high volume of checks processed means there's a margin for error.

It should also be noted, of course, that lockbox services aren't free, and their cost includes a monthly fee on top of service charges per transaction.

Finally, lockbox payments do not automatically tie into your accounting system; back-office staff must still reconcile payments with customer accounts.

Electronic Services

Some banks offer digitization and image-based lockbox services. Image-based services scan everything that gets sent to your lockbox so that you can view it online. You can often see images from payments received on the same day they reach the lockbox.

For example, Optical Character Recognition (OCR) programs “read” everything and store the output electronically. These types of services automate data entry, provide you with same-day customer and financial information, and allow you to back up and analyze your lockbox data in several different ways.

Overall, lockbox payments can save you time, help you manage your business more efficiently, and improve customer service. Whether they're right for your company or business depends on the volume of payments you receive and whether the cost of lockbox banking is offset by the reduction in mail float and increase in the availability of funds.