What Is a Lockbox Payment?

Last Updated February 14, 2024

Business owners who are considering invoice factoring to improve A/R cash flow may wonder what the payment process looks like between their customer and the factor.

For most factoring companies, lockboxes play a vital role in this process. They provide a source for both parties – the debtor and the factor – to transfer and collect payments efficiently and in a transparent, secure manner.

What Is a Bank Lockbox?

A bank lockbox payment is a payment processing service in the form of a P.O. box. Lockbox payments are an important aspect of invoice factoring and other financial transactions as they are a quick, secure way to clear checks from customers (account debtors).

How Do Bank Lockboxes Work?

First, a bank or another finance company sets up a P.O. box intended for customer (debtor) payment. Once the debtor deposits the funds in the lockbox, a bank employee sends the deposits to the processor, who transfers the funds to the bank’s client.

Lockbox processing is useful because the bank not only has immediate access to the deposited funds, but also has access to detailed digital reports of past payments and available funds, providing transparency for all parties involved. By using lockbox payments, the collections process is accelerated and simplified, which can lead to improved cash flow for businesses.

Are Lockboxes Safe?

Lockbox payments are generally a secure method to transfer checks or funds. If you’re unfamiliar or inexperienced with bank lockbox payments, it’s important to note that lockbox data is routinely monitored and backed up by the bank or company for storage and easy access.

Still, business owners should ensure they’re working with a reliable, thorough bank and factor to avoid any possible mishaps involving lockbox payments.

Lockbox Payments and Invoice Factoring

If you’re a small business owner considering invoice factoring to solve cash flow problems, know that lockbox payments are vital to the factoring process running smoothly.

Remember that when invoice factoring, your customers are notified via a notice of assignment that going forward, they will make payments to the factor instead of your business. Therefore, it will be your customer and the factoring company depositing and collecting payments through the lockbox – your business won’t be directly involved.

Once the debtor is able to pay the outstanding invoice that you’ve sold to the factoring company, the debtor deposits the check to a P.O. box (lockbox) that a factoring company like altLINE sets up to collect payments. The factor collects the deposit and sends the remaining value of the invoice (following the initial cash advance) to your business.

Note that it’s standard for lockbox processors to convert debtor checks into Automated Clearing House (ACH) payments at the lockbox site to quicken processing time and reduce labor-intensive work for the factoring company.

This leads to an important sidebar: businesses considering invoice factoring should consult with their potential factor about preferred or allowed methods for customer payment. For example, businesses may be accustomed to their debtors paying by credit card, but some factors don’t allow debtors to pay by credit card. It’s necessary for business owners to take those differences into account when weighing their financing options.

Related: Guide to Invoice Factoring

Benefits Of the Lockbox Payment Process

Increased Staff Productivity

The lockbox payment process takes a burden off company staff, who in the past may have been tasked with manually handling mail and depositing or collecting daily deposits. Instead, personnel can devote time to less labor-intensive projects.

Accelerated Payment Process

Lockbox processors usually guarantee clients that payments will be deposited to their bank account within 24 hours of when payment was received. This expedited and transparent process is attractive to businesses.

Improved Cash Flow

An accelerated payment process by effect improves cash flow for businesses thanks to reduced time between deliveries and payments. This is especially pertinent for small businesses considering invoice factoring, as typically, the primary cause for businesses weighing invoice factoring is a want or need to improve cash flow. The lockbox payment process is one of many systems put in place by bank factors to help navigate business owners toward positive cash flow.