An AR lockbox is a service provided by banks to businesses to streamline the collection and processing of accounts receivable. Instead of customers sending payments directly to the business, they mail them to a strategically located post office box (the "lockbox") accessible by the bank.
How an AR Lockbox Works:
Here's a breakdown of the process:
- Customers Mail Payments: Customers send their payments (checks, money orders, etc.) to the designated lockbox address. This address is usually closer to the customers than the business's headquarters, speeding up mail delivery.
- Bank Collects Payments: The bank regularly collects the mail from the lockbox.
- Payment Processing: The bank processes the payments, including:
- Opening the mail
- Endorsing checks
- Creating digital images of checks and remittance documents
- Depositing funds into the business's account
- Capturing payment data (e.g., invoice numbers, customer details)
- Data Delivery: The bank transmits the payment data and images to the business in a standardized electronic format. This data can be easily integrated into the business's accounting system.
Benefits of Using an AR Lockbox:
- Faster Access to Funds: By speeding up the payment collection and deposit process, lockboxes can significantly improve cash flow.
- Reduced Mail Float: Mail float refers to the time it takes for a payment to be mailed, delivered, and processed. A lockbox minimizes this float.
- Improved Efficiency: Automating the payment processing cycle reduces manual labor and administrative overhead for the business.
- Enhanced Security: The bank provides a secure environment for processing payments, reducing the risk of theft or fraud.
- Better Data Management: Electronic data delivery allows for efficient reconciliation and improved reporting.
- Scalability: A lockbox service can easily handle a large volume of payments.
Types of Lockboxes:
- Wholesale Lockbox: Typically used for businesses receiving a smaller volume of large-dollar payments from other businesses. Often involves more complex remittance data capture.
- Retail Lockbox: Used for businesses receiving a high volume of smaller-dollar payments from consumers. The emphasis is on high-speed processing and automated data capture.
- Electronic Lockbox (or Electronic Bill Presentment and Payment - EBPP): Customers pay online, and the bank electronically processes the payments and delivers the data to the business.
Example:
Imagine a national utility company with customers spread across the country. Instead of having all payments mailed to its headquarters, the company uses multiple lockbox locations strategically located in different regions. This speeds up mail delivery, reduces mail float, and allows the company to access its funds faster. The bank processes the payments and provides the utility company with electronic data, which is automatically integrated into its billing and accounting system.
An AR lockbox is a valuable tool for businesses looking to optimize their accounts receivable processes, improve cash flow, and reduce administrative burden.
