Rising labor expenses, increases in borrowing costs and improvements in automation combine to make lockbox collection services a more attractive payment processing solution than ever. Companies that haven't used lockbox services may want to consider doing so now. Here's how it works:
And if you think checks are falling by the wayside, think again. Although electronic payments have increased, more than half of companies still make business‐to‐business payments by check, according to the Association for Financial Professionals' 2016 Electronic Payments Survey. Furthermore, the percentage of businesses using checks actually increased from 2013 to 2016, the survey finds.
“Payroll is a large expense for most companies,” comments Erin Stampfl, VP Treasury Management, Johnson Bank. “Every business needs employees who are going to add value and contribute to the bottom line, rather than impact it negatively.”
“Our low unemployment rate and an increasing shortage of skilled labor for manufacturing are pushing labor costs up. So is the need for background checks for positions with access to sensitive data, such as finances. The result is that employers need to consider functions that could be performed more cost‐effectively with automation.”
Payment processing is often one of those areas. Opening mail to retrieve checks, entering payment information into accounting software, preparing a deposit slip and delivering the deposit to the bank can be completed by an entry level employee. However, even entry level employees have high costs, including salary, benefits, training and turnover.
“Using lockbox services is essentially outsourcing a portion of your payment processing,” Stampfl says. “You're taking a repetitive process and sending it to a third party that can automate. Also, lockbox never calls in sick or takes a vacation; it's always available. Any checks that come in are processed that day.”
Many businesses — especially leveraged companies — are concerned about how long it takes to receive payments. Mail delivery seems to be getting slower. At the same time, the Federal Reserve has been raising interest rates, increasing the cost of borrowing, and seems likely to continue on that path for the foreseeable future. “Every additional day that a business has to pay on their debt the more costly it becomes,” Stampfl notes. “Receiving payments sooner can save companies money on their debt service.”
“For a company that has $10 million or $20 million in debt, being able to pay it down a day or a day and a half quicker is significant. Since 2009, the cost of borrowing money has been low, so people haven't been too concerned about it, but with rates rising, it's becoming more of an issue,” she adds.
Some financial providers offer lockboxes that have a unique ZIP code, which means the mail received from the U.S. Postal Service has priority over first‐class mail. Some also offer lockboxes in different regions around the country, so you can choose a location closest to where the majority of your payments originate, further speeding up delivery.
Two types of businesses are the most frequent users of lockbox services: those that receive a low volume of high dollar‐amount checks, and those with a high volume of low dollar‐amount checks. “For low volume/high dollar payments, getting those checks processed and available for use as quickly as possible can be very important, allowing them to pay down debt,” Stampfl says. “For high volume/low dollar payments, the time spent by employees processing payments is the issue.”
“Many businesses haven't figured out how much it costs them to process a payment, but it's a worthwhile exercise,” Stampfl continues. “It can allow you to clearly see whether using lockbox service would be more cost‐efficient for you.”
Lockbox in action
A client paying a part‐time employee $28,000 per year to handle payment processing, recently changed to a lockbox service following a retirement. Rather than hiring a new employee they had someone currently on the payroll spend 15 minutes per day to upload the daily data file provided by Johnson Bank. Their lockbox cost was $4,800 per year, and the value of the 15 minutes per day for the existing employee is $1,300 per year, or $7,100 in total cost. After making the change to lockbox they are now saving $21,900 per year.
If rising labor expenses or increases in borrowing costs are affecting your business, lockbox services can help you receive payments more quickly and save you money. To learn more contact your advisor today.