Understanding Impound: A Complete Guide to Business Loan Glossary

What is Impound?

Impound, also known as an escrow account, refers to the act of setting aside funds to cover specific expenses related to a business loan. These funds are typically collected and held by the lender throughout the loan term, ensuring that essential payments, such as property taxes and insurance premiums, are made on time.

How does Impound Work?

When a borrower obtains a business loan, the lender may require an impound account to protect their interests. Here’s how it works:

  • Upon loan approval, the lender estimates the annual costs for property taxes and insurance premiums based on the business’s location, property type, and risk factors.
  • The estimated amount is divided by 12, determining the monthly impound payment added to the borrower’s principal and interest payment.
  • The lender collects this combined payment each month and holds it in the impound account.
  • When tax or insurance bills become due, the lender uses the funds in the impound account to pay these expenses on behalf of the borrower.
  • The impound account is then replenished by the borrower’s monthly payments, ensuring it remains adequately funded.

Overall, impound accounts act as a safeguard for the lender, reducing the risk of delinquencies and protecting their collateral. They also provide borrowers with a convenient way to budget for recurring expenses, ensuring they are adequately covered throughout the loan term.

Benefits of Impound

Impound accounts offer several advantages for both lenders and borrowers. Let’s explore some of the key benefits:

  • Easy Budgeting: With impound accounts, borrowers don’t have to worry about setting aside money for property taxes and insurance on their own. They make one monthly payment that covers these expenses, making budgeting simpler.
  • Peace of Mind: Knowing that property taxes and insurance premiums will be paid on time provides peace of mind for the borrower, ensuring no unexpected late fees or lapses in coverage.
  • Improved Credit Standing: Consistently paid property taxes and insurance premiums, facilitated by impound accounts, contribute to a borrower’s positive credit history, which can improve their creditworthiness in the long run.
  • Lender Protection: For lenders, impound accounts reduce the risk of the borrower falling behind on essential payments, such as property taxes. This helps protect the lender’s collateral and investment.

Cost and Considerations

While impound accounts offer benefits, borrowers need to consider the associated costs and factors that come into play:

  • Upfront Fees: Some lenders charge fees to set up impound accounts. These fees cover administrative costs and are typically added to the borrower’s loan.
  • Increased Monthly Payment: Impound accounts increase the monthly payment by including property taxes and insurance premiums. Borrowers need to ensure they have sufficient cash flow to cover these higher payments.
  • Potential Surpluses: Due to estimation, impound accounts may end up with a surplus. Lenders usually refund this surplus to the borrower, but it’s important to clarify the terms regarding surplus funds.
  • Opting Out: In some cases, borrowers may be eligible to waive the impound account requirement. However, it’s essential to consult with the lender to determine the impact on interest rates or loan terms.

Impound vs Non-Impound Loans: A Comparison

Understanding the differences between impound and non-impound loans is crucial for borrowers. Here’s a comparison to help you make an informed decision:

Impound LoansNon-Impound Loans
Mandatory for certain loansNot mandatory
One combined payment for loan and expensesSeparate payments for loan and expenses
Suitable for borrowers seeking simplified budgetingSuitable for borrowers who prefer greater control over expenses
May incur upfront feesUsually no upfront fees related to impound accounts
Protection for borrowers and lendersNo additional protection for borrowers and lenders

Impound accounts, often required by lenders, simplify loan payments by including property taxes and insurance premiums. These accounts provide a convenient way for borrowers to cover recurring expenses while protecting the lender’s interests. By understanding the benefits, costs, and differences between impound and non-impound loans, borrowers can make informed decisions that align with their financial goals.