Over the last decade, bank lockbox services have been a lifesaver for finance and treasury teams, making it easier to handle incoming customer payments through the mail. This traditional practice is obsolete in today’s age of the Internet, where customers have many options to pay. With new ways, businesses can improve their collections, positively affecting their savings and cash flow. One of the prime examples is electronic invoices that have replaced paper-based invoices to improve the accounts receivable (AR) collection process. The lockbox experience is entirely a different one for businesses and customers, which allows customers to pay in a lockbox while banks will collect and add funds into the company account to avoid straining the company’s cash flow. But the question arises: what is the purpose of a lockbox, and how can it help with the accounts receivable process? This blog will address this question and discuss the lockbox payment option in today’s financial landscape.
What is a Lockbox
A lockbox is a safe holding that businesses can rent to initiate the B2B payment process. This enables businesses to receive payments in a lockbox, allowing customers to settle debt for credit sales. Businesses can benefit from lockbox banking to process customer payments smoothly and quickly as banks have access to the customer payments through a lockbox.
What is a Lockbox Payment?
Businesses use a lockbox to direct the company’s receivables into the designated post office box, either as money orders or checks. A third-party processing company or a bank with a lockbox converts this check and deposits the funds into the company’s account. This allows businesses to convert checks into cash seamlessly, which otherwise could have taken longer. It helps a company shorten its cash conversion cycle and improves the invoice-to-cash cycle. Multinational corporations opt for multiple lockboxes to accommodate customers in their native regions.
Purpose and Working of Lockbox Payment Feature
The purpose of a lockbox payment is to make it convenient for businesses to handle payments, and allowing convenience to customers to send checks in a P.O box. After a bank collects payment in a lock box, it is collected by a bank representative. In case of multiple lockboxes, a bank representative collects remittance or payment from each box and processes it accordingly. Oftentimes, banks outsource a BPO team to collect and process lockbox payments. During the process, a digital image of the payment is generated, and electronic payments are processed while the original check is discarded. All the payments are processed on a secure platform, and the bank staff then uses the funds to complete the AR process of an organization. The bank will then send the daily report and backups to the business, based on the service level, which can be daily or weekly. This creates peace of mind for businesses, as financial management is streamlined for the business.
Benefits of Lockbox for Accounts Receivable
Lockbox banking features have many benefits for an organization. Apart from speeding up the AR process, it has the following benefits.
Reduced Workload: Businesses often outsource AR processes because manually handling the collection process is time-consuming, and it is not a scalable solution in the long run. Leveraging lockbox payment allows businesses to free up their resources and expedite the payment process.
Effective Data Security: Since the bank collects and processes customer payments, this system is secure and prevents unauthorized access, which reduces the risk of fraud.
Seamless Reconciliation Process: With the banks being the holders of customer payments and related information, they can maintain a record in a file or use an automation system for reconciliation.
Payment Flexibility for Customer: Lockbox processing benefits payers by improving customer service, but it may increase recipients’ DSO and decrease their interest income if the payer lacks sufficient funds or is holding money in an interest-earning account.
Lockbox Challenges in Accounts Receivable Process
While there are many benefits of lockbox payment, it is also associated with many challenges, which are presented here.
Risk of Errors: If the process is handled manually by a bank representative, the risk of errors is higher, which can affect the entire AR process and a company’s cash flow.
Slow Processing: Though it is easier to convert checks into cash through lockbox payments, this process is typically slow when applying payments to open invoices, which can create confusion and misunderstanding between the AR staff and customers.
Higher Time Commitment: This is another challenge where the AR team manually entering payment information cannot attend time to a higher-value task because they are committed to the process.
Decentralization of Data: Lockbox reports are sent to the company’s AR team, and your ERP system records the deposits. However, your accounting team still has to manually match up customer info with payments. This means your AR team has to put in hours reconciling the deposits with what’s in their records.
All these issues are associated with the manual AR processes. If the company chooses a third-party lockbox or integrates an accounts receivable automation solution in its ERP, it can process payments seamlessly, freeing the back-end teams and other resources involved in the process. It can also reduce operational costs needed to manage the process and reduce the likelihood of errors while ensuring seamless reconciliation.
Introducing Digital Lockboxes in Modern Financial Landscape
In today’s financial landscape, customers seek convenience and seamless processes to make it easier. Many businesses have implemented intelligent solutions to address those demands. Similarly, the traditional lockbox fails to meet those demands, which makes it an incomplete model in modern finance. However, the digital lockbox has a solution that can facilitate the company’s AR process.
With a digital lockbox, customers will not have to mail checks; they can pay electronically using the digital web to receive money. This can be received electronically in the form of ACH, debit card, credit card, bank transfers, or eChecks. With e-payment options, it increases customer convenience while making the process faster, more efficient, affordable, and more secure than the traditional counterpart. However, electronic lockboxes come with different subscription levels, and you can get the best security with a higher subscription.
To navigate this issue and other limitations of digital lockboxes, you can automate the entire process by implementing an AR automation solution for consolidated information and gaining higher visibility into your payment process. This not only helps maintain privacy and confidentiality of your business and customer information but also frees your finance teams so they can work on tasks with strategic value