In business, this comes up from time to time and people start to ask “what is a lockbox account”? The word “lockbox” can refer to one of two things. The first is a service that is offered by certain commercial banking institutions. The bank will set up a PO Box located in a close proximity to the bank, where they regularly go to pick up checks that are mailed. Companies can use this PO Box as a place to have its customers mail checks so that the bank can process and deposit them right away.
What is a Lockbox Account?
The second type of lockbox is simply a special kind of bank account. It’s usually a sweep account opened at a particular bank that is opened in the name of the borrower. Certain types of business lending require that the borrow utilize this type of bank account as a way to facilitate the repayment of the loan or whatever type of business funding has been provided. Payments that would normally go directly into your operating account would be sent to this lockbox account. What usually happens next is that the lockbox is set up to sweep a certain percentage of these deposits directly to your business funding source, while the rest is swept directly into your business checking account.
This provides an easy way for business funders to set up a system of getting repaid for a loan. You would simply agree on a specific percentage, and once the lockbox starts to get deposits, you would begin to repay your loan.
There are several benefits to using a lockbox. The first, and probably the most important to most business owners, is that you are generally able to avoid switching your credit card processing. Certain lenders and certain types of business funding usually require that borrowers utilize their own credit card processing services, but with a lockbox, you can skip that part. You just instruct your current credit card processor to deposit your settlements into the lockbox instead of having them go directly into your checking account. People sometimes do not want to switch their processing, either because they have a certain type of equipment that isn’t compatible with a lot of processors, or they just aren’t comfortable switching. The lockbox is a suitable alternative.
There is really only one major drawback to utilizing a lockbox account. That is that it adds an extra day to how long it usually takes you to receive your payments. Your credit card processing, as another example, normally takes 2 business days to deposit. So if you settle out your machine on a Monday, you usually see your sales hit by Wednesday. If you add the lockbox to that equation, your lockbox would see the deposit hit on Wednesday, and then it would sweep to your operating account which would effectively see the deposit hit on Thursday. Sometimes, that extra day is a big deal to certain businesses, especially if they have tight margins and cash-flow. But other times it’s not a big deal at all.