What is cash dominion and a lockbox in an ABL facility?

The pieces of a cash dominion arrangement

Cash dominion is less a single clause than a set of plumbing that routes the business's money through the lender. The terms come up together in term sheets and closing checklists:

The reason for all of it is that an asset-based lender's collateral turns into cash. A lien on a receivable is strong until the customer pays; then it is money in an account. Directing that money to the lender, every day, keeps the lender's collateral and its loan in step. It is also why most asset-based lenders treat dominion, at least in springing form, as a fixed feature rather than a negotiable extra. See borrowing base.

Full dominion and springing dominion

The same control documents are signed either way. The difference is whether the lender uses them from the start.

• Full dominion sweeps collections against the line every business day from closing. It is more common for smaller borrowers, for lenders without a deposit relationship, and for businesses with thinner availability or a shorter reporting history.
• Springing dominion leaves collections in the business's accounts until a trigger, usually excess availability falling below a set level, or an event of default. Once triggered, sweeps run until the business satisfies the release conditions in the agreement.

The trigger level, how availability is measured against it, and how dominion ends are the terms worth negotiating, and they should be set against the business's projected low point of availability. They are covered in detail in why your lender wants a lockbox and cash dominion vs springing dominion. The same trigger often switches on a springing covenant, so the two tend to arrive together.

A week under full dominion

Full dominion changes how cash looks on any given day. Take a distributor with a line fully in place. The operating account starts the week nearly empty, as it usually is under dominion. Availability is the unused room under the borrowing base, recalculated as receivables are reported. In this week new invoicing keeps pace with collections, so the base holds steady; in a week when collections outrun new invoicing, the base would fall and availability with it.

Three things stand out. The loan balance swings with the business's cash cycle, so interest is charged on a lower average balance than if cash sat idle in an account. The operating account never holds much, because every collected dollar has gone to the lender. And Wednesday's payroll left availability at its low for the week: that number, not the cash balance, is the business's cushion. A business under dominion that tracks its bank balance instead of its availability is watching the wrong figure.

Under cash dominion, your liquidity is your excess availability. Manage that number the way you used to manage your bank balance.

What changes in day-to-day cash management

The mechanics are simple once they are set up, but several habits have to change:

• Every payment starts with a draw. Payroll and supplier runs are funded by borrowing requests, sent ahead of the lender's daily cut-off. Someone in the finance team owns the draw calendar.
• Forecast availability, not cash. A weekly forecast of collections, disbursements and the borrowing base shows whether the week's payments fit within availability, and warns of a low point before it arrives.
• Customers must pay to the right place. Every invoice carries the new remittance details. Payments that still arrive in an old account must be turned over to the collection account promptly, and the lender will ask about them at each field exam.
• Non-customer receipts need a route. Card settlements, marketplace payouts, tax refunds and insurance proceeds may also be directed to the collection account. Settle which receipts go where before closing.
• Distributions and unusual payments get harder. Anything the loan agreement restricts, such as restricted payments to owners, needs availability and compliance with the agreement's conditions at the time of the draw.

The risk to plan for is that dominion ties collections and borrowing together. When the borrowing base shrinks, because sales dip, invoices age or a large customer is excluded, collections still pay down the line but availability does not refill by the same amount. A business can find that its customers paid it well in a month and it still has less to spend. That is not the lender withholding money; it is the formula working. It is also why an overadvance under full dominion shows up at once.

The accounting and covenant side

Dominion has a balance sheet consequence that is easy to miss. Under US accounting rules, a revolver whose collections automatically repay the loan through a lockbox is generally classified as a current liability, even if the facility matures years out. Springing arrangements usually do not force that until they spring. For a business that reports a current ratio to a surety, landlord or another lender, or carries a current ratio covenant, the classification matters. Raise it with the accountant before the structure is agreed.

Dominion also reduces cash on the balance sheet to near zero, which can alarm readers of the statements who do not know the structure. A short note in the financial statements, and a line in any lender or surety presentation explaining that liquidity sits in availability, avoids the question.

Where cash dominion fits

Dominion is the price of what an asset-based line offers: availability that grows with receivables, often a larger line than a cash-flow lender would give, and room for businesses whose earnings are uneven. See asset-based vs cash-flow lines. Cash-flow bank lines rarely sweep collections, although the bank usually requires the operating accounts to be held with it. Factoring goes further than dominion, since the factor buys the receivables and often collects them directly; see factoring vs asset-based lending.

Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines, and they differ on whether dominion is full or springing, where triggers sit and how collections are handled. Transparent's financing model projects the borrowing base, loan balance and availability month by month, so a business can see where its low points fall before it chooses a structure. For businesses moving from factoring to a line, see moving from factoring to an asset-based line.