Meaning
Tripartite legal contracts establish a secured party’s control over a deposit account held at a custodian bank. Under an accounts control agreement, the debtor retains access to the funds until the secured lender issues a notice of exclusive control. This mechanism allows a manufacturer to deploy working capital while providing the asset-based lender with a perfected security interest in the underlying cash receipts.
The contract terminates only when the secured obligations are fully satisfied.
Control Transfer
Operational control of the deposited cash shifts immediately upon the lender delivering a written instructions directive. Execution of this shift prevents the debtor from executing withdrawals, originating wire transfers, or initiating automated clearing house transactions from the designated account. The custodian bank must comply with the instructions of the secured party without further consent from the depositor.
Trigger Event
Lenders typically delay exercising their rights until a material breach of the financing conditions occurs. This activation occurs when the debtor fails to maintain the agreed inventory levels, misses a debt service payment, or violates a financial covenant. Calling the trigger prematurely risks disrupting the supplier relationships of the manufacturer by freezing the cash flow required for raw material procurement.
The lender must therefore balance the risk of cash dissipation against the operational damage caused by blocking trade payments.
Asset Preservation
Cash receipts from finished goods sales flow directly into the blocked account, establishing a clear audit trail for the working capital provider. This perimeter ensures that the cash proceeds remain identifiable during the manufacturing scale-up phase.
