Evaluating Asset Based Borrowing Base Formulas in Growth Financing
Evaluating borrowing base availability demands stress testing collateral eligibility carve-outs against dilution and liquidation haircuts.
Block Account Agreement
Meaning
Legal contracts established between a borrower, a lender and a depository bank govern the flow of cash receipts into a designated account. Signing a block account agreement ensures that payments from customers are routed directly to a controlled environment where the lender holds a perfected security interest. This structure prevents the borrower from redirecting funds before the lender satisfies the daily loan balance.
Control Arrangement
Tripartite structures define the responsibilities of each party regarding the handling of incoming wire transfers and checks. The bank follows standing instructions to sweep funds to the lender at the end of every business day. If a dominion event occurs, the lender assumes full authority over the account activity.
Disbursement Restriction
Funds held under these terms remain inaccessible for general corporate purposes until the lending institution releases the specific portion of the cash. Operations rely on a predictable cycle where the borrower submits a borrowing base report to request new advances based on the newly collected cash. This creates a closed loop where the movement of money is visible and restricted.
Default Trigger
Provisions within the document specify exactly when the bank must stop taking instructions from the account holder and begin following only the commands of the secured party. Common triggers include a failure to maintain a minimum fixed charge coverage ratio or a missed interest payment. The transition of power happens immediately upon the delivery of a notice of exclusive control.