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Right of offset
Also called setoff, right of setoff, banker's lien, offset.
A creditor's right to apply funds it holds for you against what you owe it - most commonly a bank taking money from your deposit account to cover a defaulted loan.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The right arises from the deposit agreement, from the loan agreement, and in some circumstances from common law principles governing mutual debts. Where it applies, no lawsuit and no court order are required: the bank moves the money internally.
For a business that borrows from the bank holding its operating account, this concentrates risk in a way that is invisible until it is not. A default - including a technical covenant default with no missed payment - can be followed by the account being swept, and payroll clears from that same account.
Related but distinct concepts appear elsewhere. In factoring, a customer's right to offset what it owes on an invoice against what the client owes it - a contra account - reduces the value of the receivable and is one reason factors exclude contra relationships from eligibility. In ABL, account control agreements and lockboxes achieve a similar practical effect by contract.
Scope and limits vary by state and by account type, and certain funds - some trust accounts, some payroll tax accounts, some government-benefit deposits - may be treated differently.
Where this one catches people
If your operating account sits at the bank that holds your loan, a default can empty it without notice, a hearing or a judgment. The exposure is created by convenience rather than by any term anyone drew attention to at closing, and the standard mitigation businesses use is simply not to bank where they borrow.
Where you will meet this term
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Right of offset — common questions
What does right of offset mean?
A creditor's right to apply funds it holds for you against what you owe it - most commonly a bank taking money from your deposit account to cover a defaulted loan.
Where does right of offset catch people out?
If your operating account sits at the bank that holds your loan, a default can empty it without notice, a hearing or a judgment. The exposure is created by convenience rather than by any term anyone drew attention to at closing, and the standard mitigation businesses use is simply not to bank where they borrow.
Is right of offset the same as an interest rate?
Right of offset is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does right of offset apply to?
Term Loan, Business Line of Credit, Invoice Financing, Asset-Based Lending.
Is there a worked example of right of offset?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside right of offset?
Acceleration clause, Covenant, Event of default, Lockbox, Notice of default.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.