What Is a Disbursement?

Disbursement occurs when one person, business, or organization distributes funds to another person, business, or organization, usually from a larger pool or collection of funds. It can be the person who distributes the funds to someone else, or it can be the person who receives the payment.

The term “disbursement” is used to describe transfers of funds to and from different entities, including creditors, governments, non-profit organizations, and the general public. Learn more about disbursements and how they work.

Examples of definition and disbursement

When funds are paid from one entity to another, this is called a disbursement. A disbursement is usually in cash or its cash equivalent and is usually a form of payment. You can shell out money to a business, or a business may shell out money to you, for example, in the form of a refund. The act of making a disbursement is called a disbursement.

Other examples of disbursements include:

  • You invoice a company for the work you hired for; disburse the funds as payment.
  • Buy a house with a mortgage; your lender disburses the funds to the seller at closing.
  • You retire and receive regular disbursements from your retirement account.
  • Use student loans to pay for school; the lender disburses funds for your school.
  • A government disburses emergency funds to a municipality for humanitarian aid.

How the disbursement works

Disbursement is the transfer of money from one entity to another; it is usually the distribution of a portion of the funds in a much larger account.

If a business owes money to a person, bank or organization, it can disburse money to the appropriate part of an account intended for that purpose. If you owe money to an organization, perhaps from a class action lawsuit, your payment may come from a much larger outlay of funds from that organization.

When a disbursement occurs, the funds are transferred from one institution to another, usually a bank. This can be by direct deposit, such as an ACH transfer, or by wire transfer, a cash deposit, or a written check.

When a disbursement occurs, details of the transaction are recorded, such as the date the payment was made, where the money came from, and why the disbursement is being made.

The terms disbursement and payment can sometimes be used interchangeably, although there is a subtle difference in their meanings: a payment doesn't need to come from a much larger account, for example, but a disbursement usually does. Also, a payment may come from funds that you do not own, while a disbursement may not. For example, you would not make an outlay of funds from your credit card to cover a utility bill, but you would make a payment with your credit card to pay the utility bill.

Types of Disbursement

Disbursements come from a variety of institutions for a number of different reasons, including disbursements that are:

  • Federal: If you received a stimulus check or a tax refund, that was part of a much larger outlay of federal funds.
  • Work-related: If you are paid for services rendered, it may be in the form of an outlay.
  • For Student Aid: Your lender periodically disburses funds to your school, in the form of disbursements, to pay for college expenses.
  • From an escrow account - If the mortgage lender deposits part of your monthly payments into an escrow account, the lender must make timely disbursements from that account to pay for property taxes, home insurance, and any another item required by your mortgage.
  • Investment related: If you receive dividends from investments, those dividends are considered disbursements from the paying business or companies.
  • Retirement related: Many retirement plans require minimum distributions, which indicate a minimum amount of money that must be disbursed annually from your retirement account to avoid penalties.

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Source:Castle Associates

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