Collection account: Overview, definition, and example
What is a collection account?
A collection account is a designated bank account used to receive and manage payments from customers, borrowers, or other sources. These accounts are often used in loan agreements, securitization structures, and financial transactions to ensure that funds are properly collected, allocated, and disbursed according to contractual terms.
For example, in a loan securitization agreement, borrower payments are deposited into a collection account before being distributed to lenders, investors, or other stakeholders.
Why is a collection account important?
A collection account is important because it centralizes incoming payments, ensuring that funds are securely received and properly allocated. It is commonly used in structured finance, escrow arrangements, and business operations where multiple parties rely on accurate and timely payment distribution.
For businesses, including a collection account in financial agreements helps prevent mismanagement of funds, reduce credit risks, and ensure compliance with financial regulations. This is especially relevant in lending, investment management, and debt servicing agreements.
Understanding a collection account through an example
A leasing company finances equipment for multiple clients. The contract requires all lease payments to be deposited into a collection account, from which funds are distributed to investors, lenders, and operational expenses. This ensures that all payments are tracked and allocated according to the financing structure.
In another case, a construction project lender sets up a collection account to receive loan repayments from the project’s revenue streams. The account is managed by a third-party administrator, ensuring that funds are used first for loan repayments before any remaining balance is transferred to the borrower.
Example of a collection account clause
Here’s how a collection account clause might appear in a contract:
“The Borrower agrees to deposit all receivables into the designated Collection Account maintained with [Bank Name]. The Lender shall have the right to monitor and direct the disbursement of funds in accordance with this Agreement. The Borrower shall not withdraw or redirect funds from the Collection Account without prior written consent from the Lender.”
Conclusion
A collection account provides a structured and transparent method for managing incoming payments, ensuring that funds are securely received and allocated according to contract terms. This provision is essential in financial transactions, loan agreements, and structured finance deals, helping parties mitigate risks, improve payment tracking, and comply with financial obligations. Including a well-defined collection account clause in contracts ensures clarity, accountability, and financial integrity in payment management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.