A lockbox is a payment collection service run by a bank. Customers mail checks to a post office box controlled by the bank, or pay electronically to an associated account. The bank opens and deposits the payments and reports the details to the account holder.
How it works in factoring
Factors commonly use lockboxes to receive payments on the invoices they purchase. In a notification arrangement, the notice of assignment and each invoice direct customers to the factor's lockbox. The bank deposits payments and sends images and remittance data, which the factor uses to apply each payment to the right invoice.
Lockbox structures vary:
- Factor-owned lockbox: payments go straight to the factor's account.
- Seller-titled lockbox under the factor's control: the account is in the seller's name but subject to a deposit account control agreement. This is common where the customer's systems or rules require payment to the vendor's own name, as in healthcare.
Lockboxes reduce the chance that payments reach the seller and get mixed with operating funds. They also speed up posting and give the factor a clear audit trail.
What to check
- Whether lockbox charges are passed through to you as a separate fee
- How quickly the factor applies payments and updates your reports
- What happens to the lockbox address after the relationship ends, and how customers will be told to switch back
- How payments that are not related to factored invoices are returned to you
Clear remittance instructions on every invoice are the simplest way to keep payments flowing to the right place.