What is a Reverse Lockbox?

Under a reverse lockbox arrangement, suppliers are instructed to send their invoices to a company's bank, which digitizes the invoices and forwards them to the company's accounts payable system through an online interface. The company then flags the approval status of each invoice and transmits this information back to the bank, which pays the invoices when their payment terms indicate that they are due for payment. The bank then sends payment information back to the company's accounts payable system, indicating which invoices have been paid.

In short, banks use their high-speed document management systems that are normally applied to the handling of incoming checks to the handling of incoming invoices, thereby taking some accounts payable tasks away from client companies. This also makes it less likely that bank customers will shift their business to a different bank, given the high level of customized integration needed to install a reverse lockbox system.

Advantages of a Reverse Lockbox

There are multiple advantages associated with a reverse lockbox, which are as follows:

Increased payment processing efficiency. The reverse lockbox centralizes outgoing payment processing, ensuring that disbursements are organized and timely.
Improved cash flow management. By centralizing outgoing payments, businesses can better predict and manage their cash flow.
Cost savings. Automating payment disbursements through a reverse lockbox reduces labor costs associated with manual check writing and distribution.
Reduced fraud risk. Banks handling the reverse lockbox can provide secure payment processing, which decreases the likelihood of fraud.
Enhanced scalability. As businesses grow, a reverse lockbox can handle increasing payment volumes efficiently without requiring significant changes to the system.
Streamlined bank reconciliation. Since all payments are funneled through the reverse lockbox, reconciliation of disbursements with bank statements becomes more straightforward.
Integration with digital payment systems. Many reverse lockbox services integrate seamlessly with digital and automated payment systems, making them compatible with electronic funds transfers, wire transfers, and ACH payments.

Reverse Lockbox Best Practices

A best practice relating to the reverse lockbox concept is for the bank to take on some of the payment approval process by working through a set of automated decision rules, such as paying all invoices below a certain threshold amount, and all invoices from a list of pre-approved suppliers. It may even be possible for the bank to access the company's purchasing and receiving systems, and conduct a three-way match based on the information in these files.

Reverse Lockbox Control Issues

Using a bank to process some aspects of a company's accounts payable transactions shifts some control issues to the bank, which makes it easier for a company to comply with the control requirements of the Sarbanes-Oxley Act. However, the company will need to ensure that the bank has proper controls in place.

Lockbox vs. Reverse Lockbox

Under a lockbox arrangement, a business instructs its customers to mail their payments to a mailbox operated by the company's bank, in order to cash their checks more quickly. Under a reverse lockbox arrangement, a business instructs its suppliers to send their invoices to its bank, which processes payments to them. Thus, lockboxes deal with inbound cash flows from customers, while reverse lockboxes deal with outbound cash flows to customers.