Springing lockbox arrangement
/What is a Springing Lockbox Arrangement?
A springing lockbox arrangement requires the use of a lender -controlled deposit account only when there is a triggering event, such as a loan default by a borrower or the failure of a debt-service ratio . At that point, the account is set up and payers are notified to send their payments to the lockbox . Examples of other actions that can trigger a springing lockbox are as follows:
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A delay by the borrower in making a loan payment, typically beyond a certain threshold date
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A decline in the borrower’s credit rating below a certain threshold value
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The inability of the borrower to meet a minimum financial ratio as outlined in the debt agreement
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The borrower’s breaching of a financial covenant as outlined in the debt agreement
Advantages of a Springing Lockbox Arrangement
There are several advantages to setting up a lockbox, which are as follows:
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Lender security . A springing lockbox arrangement provides the lender with some security, since it then has direct access to the borrower's cash flows . These funds can then be used to pay down the remaining balance on the lender’s loan.
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Efficient transfer of control . This approach minimizes the need for legal hassles when setting up the lockbox, because the borrower has already agreed to it as part of the original lending contract.
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Minimal costs . There are no periodic costs associated with having a lockbox until the account is created.
Disadvantages of a Springing Lockbox Arrangement
When a lender obtains loan payments directly from a borrower’s cash flows, this presents a significant risk that the borrower will not have enough cash flows remaining to pay its other obligations . A possible outcome is that the borrower will go bankrupt in short order.
