The lockbox and cash dominion: what it is like when your receipts stop passing through your hands

Your customers keep paying you. The money just stops arriving in an account you control. That is cash dominion, and it is normal in asset-based lending, which does not make it a small thing to agree to.

Three ways the money can move

Which one you have is a negotiated point at closing and it is worth negotiating, because it decides who is holding the cash on the worst day of your year.

What the plumbing is

A lockbox is an address or an account your customers remit to. A deposit account control agreement, signed by you, the lender and the bank, is what lets the lender direct the funds in an account without your further consent. The agreement is either "springing" — the bank follows your instructions until the lender sends a notice — or in force from the start.

The practical consequence is that a piece of paper signed at closing, plus one notice from the lender to your bank, can change who controls your receipts in a single business day.

The daily loop

Under full dominion the cycle looks like this: customer payments land in the blocked account; the bank sweeps to the lender; the lender applies the funds to the loan balance, which rebuilds availability; you request a draw for payroll, suppliers and everything else; funds move to your operating account.

Two details in that loop cost money and are worth pinning down in the credit agreement:

What the timing lag actually costs

Illustrative only — suppose collections run 400,000 a week across five business days, so 80,000 lands each day. Under a same-day application convention, every dollar reduces the balance on the day it arrives. Under a two-business-day convention, 160,000 of your money is sitting on the lender's side at any given moment without reducing what you are being charged on. At an illustrative 12% a year on the revolver, that permanent 160,000 of float costs about 19,200 a year. A one-day convention costs half of that.

Nothing in the pricing section discloses it. The margin is identical in both versions; the money in use is not. When you compare two asset-based proposals, ask each lender for the application convention and any clearance period in writing, work out the float on your own collection volume, and add it to the spread before you rank the two.

The same arithmetic runs backwards on draws. If a request made at 2pm funds the following morning, you have to keep a day of payroll permanently outside the facility, and cash held outside the facility is cash that is not paying the line down.

What it feels like when dominion springs

Availability drops below the trigger. Notice goes to your bank. Overnight, receipts route to the lender, and every dollar you spend has to be requested from a credit officer who is now, by definition, worried about your file.

The lender does not have to declare a default to slow you down. It can raise reserves, cut an advance rate after a field exam, or simply take longer over draw requests. If collections are going in and draws are not coming out at the same rate, a business can be starved of cash in a fortnight without a single formal enforcement step. That is the power cash dominion hands a lender, and it is why the trigger levels matter more than almost any other number in the document.

What to negotiate before closing

• Springing rather than full dominion, where the lender will accept it, with a clearly measured trigger.
• A de-springing right. If dominion springs on a covenant trip, can it revert after, say, thirty or sixty consecutive days back above the trigger? Without this, one bad month means permanent dominion.
• Application convention and cutoff times, stated in the agreement rather than left to operations.
• Notice. Whether you get any warning before the lender sends the activation notice to the bank.
• A carve-out account for payroll taxes and trust funds, so that money you hold for employees and the tax authorities is not caught up in a sweep.

The operational work nobody warns you about

Every customer has to be told to remit somewhere new, and some of them will keep paying the old way for months. Cheques arrive at your office and have to be forwarded intact. Portal payments and card payments may need rerouting. Wires need new instructions circulated. Budget staff time for a month of chasing remittance details, and expect the borrowing base to look strange while payments are landing in two places.

None of this is a reason to avoid an asset-based facility. It is a reason to read the cash management section as carefully as the pricing section, because that is where the control actually changes hands.