Checks and balances Featured

7:00pm EDT November 25, 2007

Does your business receive an average of more than 100 checks per month from your customers? If it does, you may be all too familiar with the problems that can arise from handling a multitude of accounts receivables, particularly if your business is growing. Checks arrive only once a day by mail and must be processed and deposited in the bank on a regular basis in order to ensure good cash flow. The problem arises when you must hold checks over a day or two because your staff doesn’t have the time to process them.

One way to manage this inflow of money is to use lockbox processing, which is a cash management service provided by banks to their corporate customers.

“Lockbox services are designed to speed up the collection and deposit of check payments that are received through the mail,” says Tracy Marshall, vice president of Treasury Management Operations for ViewPoint Bank, based in Plano, Texas.

Smart Business spoke with Marshall about how a lockbox service works and the advantages of using this type of service.

What types of businesses use lockboxes?

Businesses that typically use lockboxes are those that receive paper check payments in the mail from consumers or business customers. Businesses that receive payments by credit card, through an online merchant account or over the counter do not need a lockbox service.

Businesses that use lockbox services either deal directly with the consumer — such as doctor’s offices, local utility companies, cable TV franchises and local governments — or are companies that have many business clients, such as printers or manufacturing suppliers. Banks sometimes offer two different lockbox products, one for retail and one for wholesale. Retail accounts typically have more checks to process and more paperwork.

What are the benefits to having a business lockbox?

Its primary advantage is the lockbox’s direct impact on a business’s cash flow. Checks are received faster, bypassing the business’s internal mail sorting and delivery time. Once the checks are received in the special P.O. box, they are processed faster — often checks are delivered to the bank several times a day. Therefore, the money is available to the business sooner. Using a lockbox also reduces internal staff requirements, since the lockbox service acts as an accounts receivable department.

Another benefit is the ability to see remittance information online — many banks offer image delivery services, which allow the business to quickly access financial information — such as average daily sales, average remittance size, etc.

How does the lockbox service work and what are the fees?

A special local post office box is set up to collect all remittances. The bank’s lockbox service collects these payments several times a day from the post office, sorts and processes the checks, posts the payments, and makes copies of the checks and all correspondence/remittance paperwork, then deposits the checks in the business’s account. The remittance package is then sent along to the business — either electronically or by mail — to post on the business’s system.

The cost varies depending on the types of services, but a basic maintenance and per-item fee can be bundled into a $100 per month charge. That will typically include about 100 processed checks per month, online check retrieval for paid items and e-mail notification of a deposit. For customers who have a higher volume of checks that need to be processed, the price goes up from there to a maximum of about $350 to $500 per month. Again, the price depends on the business’s needs. Retail accounts are generally more expensive than wholesale accounts since more checks need to be processed on a monthly basis.

Are there any downsides to using a lockbox service?

The perceived downside could be the cost of the service, but not if a business owner considers the cost of paying an accounts receivable employee or two.

Also, banks’ commercial clients are often on account analysis, meaning that if a certain balance is met on a monthly basis, the client is eligible for a credit. That credit can be used to offset the lockbox service charge.

TRACY MARSHALL is the vice president of Treasury Management Operations for ViewPoint Bank, headquartered in Plano, Texas (www.viewpointbank.com). Reach Marshall at (972) 801-5838 or Tracy.marshall@viewpointbank.com.