When your lender requires a deposit account control agreement, you may be faced with a number of questions and considerations. Here, we explain four subjects you should understand in order to be prepared for negotiations.
Deposit account control agreements offer protection for the lender in case of a default. In the event of a default, actions described in the agreement will be taken to redirect any funds in the account to the lender to assist in repayment of the borrowed funds.
A cash management agreement may be recommended to work in tandem with the deposit account control agreement.
The cash management agreement dictates the flow of funds through a cash management account and/or lockbox services, remote deposit, electronic only or a combination.
Implementation of the account opening may begin while the blocked account agreement is still being negotiated. You will need to work with the bank to establish the account. Online access will be provided along with any other required treasury management services during the onboarding process.
A wire transfer process will also be implemented. For a hard agreement, the wire will be in the form of a Standing Transfer Order and will occur on a regular basis according to the finalized document.
What type of account you choose and how deposits are made can affect your implementation timeline and costs for account servicing.
Begin the account opening process as soon as possible. New “Know Your Customer” regulations may increase the time needed to complete the process. No matter what type of account you select, you will need it to be active when the agreement is executed.
Most agreements utilize a lockbox service for the collection of receivables such as rent payments.
Other borrowers opt for remote deposit. In this case, checks are deposited into an account on a regular basis via a scanner. This service may need to be approved by the lender before implementation. A questionnaire must be completed and a scanner should be purchased if a compatible one has not already been obtained.
If an electronic only option is selected, no lockbox or PO box is required. The clearing account will receive electronic payments. Again, this option will need to be approved by the lender during the account setup process.
Building the Team
When you begin to negotiate a control agreement, it’s important to engage an experienced team. There are many parties involved in the process and it’s important to confirm timely responses from all parties. You may want to include your attorney, accountant and the person who will be managing the account on a daily basis.
Deposit Account Control Agreement: A legally binding agreement among a debtor, secured party and bank confirming the secured party or lender maintains control over the account should a default situation arise.
“Hard” Agreement: Blocks the borrower from interacting with the receivables deposited into the blocked account. The funds are transferred to another account through use of a Standing Transfer Order wire on a regular schedule as agreed upon in the legal document.
“Springing” Agreement: Allows the borrower to utilize the funds received into the blocked account unless there is a trigger event, upon which time the funds will be directed to a lender-owned account.
Depositor/Customer/Borrower: The entity that receives funds and manages the deposit account with the depository bank.
Creditor/Secured Party: The entity that is lending funds and will receive funds in the event of default.
Trigger Event: An event of default that “triggers” or begins the alternative flow of funds within a springing agreement.
Lockbox: The service offered by the financial institution where receivables are sent to a PO box and processed.
Because most borrowers choose a lockbox as an account option, the term “lockbox agreement” is often used to describe a control agreement.
Blocked Account Agreement: A synonym for deposit account control agreement.
Indemnification Clause: Dictates the entity or person responsible to provide compensation in the event of loss or damage.