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The Importance of Lockbox Payments To B2B

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Posted by Matt Osborn - 03 December, 2019

The Importance of Lockbox Payments To B2B

Unlike so many B2C businesses, B2B still has to deal with a large number of paper check payments. Paper checks bypass the smooth efficiency of digital payments, which are mostly automated. The world of processing paper check payments is a laborious and tedious business. B2B accounts receivable staff will tell you that paper checks, especially in high volumes, are the thorn in their side.

Not all B2Bs suffer from this affliction. Instead of handling paper checks, they free up resources by using what's called a lockbox service. In this article, you'll learn all about lockboxes and why businesses use them.

What Are Lockbox Payments?

Before we understand what lockbox payments are, let's look at the accounts receivable process without a lockbox first. This will help us see where lockbox services fit into the accounts receivable process.

Customer payments need to reach you somehow. The address for customers to send their payments is included on the invoice. Customers send a paper check to the address. Once payment is received, AR staff perform data entry to record receipt of payment. Next, the check must be deposited into the business' bank account. Once the check clears, it can be reconciled with the businesses accounts. That completes the AR process.

Issues with payments can arise if you have customers spread across the U.S. It can take a few days for mail to arrive from one coast to the other. Additionally, some customers may not send their payment until the last second so that they can capture as much interest on funds as possible. Both scenarios increase your DSO.

Lockbox services help to resolve these issues. Lockboxes are placed at locations across the U.S. This helps speed up the receipt of mailed payments. For a business on the east coast with customers on the west coast, a west coast lockbox can process payments quicker than waiting for the mail to travel across the U.S. Once payment is received at the lockbox, which is a post office box address, payments are processed. Meaning, they are deposited into your account. 

Lockbox services can process payments on a daily basis. If your AR staff goes to the bank only once per week, DSO will be impacted. With daily processing of payments, there's no impact on DSO. The lockbox service scans all documents received by customers, including paper checks and remittance documents. To ensure the arrival of customer payments at the lockbox, you must change the payment mailing address and be sure customers are aware of the change.

To scan so many documents, the lockbox service may use a BPO that specializes in scanning documents. Lockbox services can handle high volumes of documents as well. The number of documents to be scanned can affect the price you'll pay. Because lockbox services are labor-intensive, they aren't cheap. But this labor is moved out of your business. Fees for lockbox services usually consist of a setup fee and monthly fee.

Lockbox services can be split into two categories - retail and wholesale. These two categories are starting to become more blurred. In general, retail lockboxes are smaller payments, while wholesale lockboxes are larger payments.

lockbox - how it works

(source)

Lockbox services also cater to specific industries such as real estate and healthcare. Specific to real estate, tenants mail their payments, along with a coupon, to the lockbox address. This bypasses delays in sending payments to the property management or apartment complex offices. The coupon is not for a discount on rent. Rather, it has a barcode that makes it easy to identify the customer, payment, and other important information. This barcode allows automated scanning software to populate information into its system. Not all lockbox services include this barcode technology but it can speed up the service and avoid errors. It's certainly worth considering when comparing different lockbox services.

Besides scanning of documents and processing payments, lockbox services offer a number of additional features, which we will look at next.

Additional Lockbox Features

Besides processing and scanning of payments, lockboxes offer additional services. Services offered will vary by lockbox service and often cost extra. These services can include:

  • Daily reports
  • Nightly backups
  • Coupons with barcodes for auto-populating data into the system.
  • Online access: Allows you to view process payments and any other scanned documents. Avoids the need for media such as CDs or DVDs.
  • Integration with CRM, ERP, and accounting software
  • Images stored to CD or DVD.

How Are Lockboxes Related To Outsourcing?

Lockbox services are designed for outsourcing a part of AR, as described above. This area of AR is called the cash management process or the cash application process. The cash application process is very manual and tedious. Customers send remittances, followed some times days or weeks later by the associated payment. Some customers don't send any remittance. These payments must be entered into the company's accounting software. Any paper checks need to be brought to the bank and then later reconciled in the company's accounting software. If that all sounds familiar, it's because it is. Those are the same tasks performed by a lockbox service.

Now we can see why lockboxes are great for  outsourcing the cash application process. While lockboxes aren't meant to handle all of AR, for companies that are just starting to outsource their AR, lockbox services can be a great first step.

Image result for outsource ar statistics"(source)

The Future of Lockboxes

With electronic payments becoming the primary payment method, you might ask why lockbox services are even needed. For B2C companies, lockbox services don't provide much value. Their customers mostly pay by credit card. In B2C, those customers who pay by paper check don't really bottleneck AR because there are so few of them.

That isn't the case with B2B. Paper checks still have a large share of the market when it comes to payments. In fact, Payments Journal noted that 47% of the value of B2B payments in 2018 came from paper checks. That's nearly 1/2 of all B2B payments. However, electronic payments such as credit cards, ACH, and eChecks are gaining ground. But until paper checks disappear, lockbox services will certainly have a place in the B2B industry.

Summary

  • Lockbox services can help process payments on a daily basis for your customers spread across the U.S
  • Lockbox services can be separated into two categories - retail lockboxes with smaller payments and wholesale lockboxes with bigger payments
  • Lockbox services manage a part of your AR called cash management or cash application process. Lockbox services handle the complicated and tedious cash application process for you.
  • Lockbox services can help you run your B2B business payments efficiently and smoothly even in high volumes

 

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Topics: Finance

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