How Rho makes it easy to set up Deposit Account Control Agreements (DACA)

When and why businesses and lenders use DACAs – and how Rho helps businesses secure one.
Author
Vivian Jiang
Chief Payments Officer
Published
February 6, 2024
read time
1 minute
Reviewed by
Updated
July 11, 2024

While banks are a common type of lender, certain businesses may not have the ability to secure the lending terms they’d prefer from their bank or may receive better terms from another lender. 

To facilitate such a lending transaction, your business may need a Deposit Account Control Agreement, which is a multi-party agreement that helps third-party lenders establish a security interest over a customer’s deposit account held by another entity. 

Read on to learn more about Rho’s DACA offering.

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How Rho makes it easy to set up a DACA

The benefits of setting up a DACA with Rho

Rho offers Springing DACAs that can be set up in as little as a week, and we do not currently charge any fees if the customer holds their deposits with Rho

We offer DACA accounts in collaboration with our banking partner, Webster Bank N.A. 

The borrower will, however, have full control over the account unless Rho is authorized otherwise by the lender via written consent (typically due to the Borrower not being compliant with the account agreement).

Currently, the DACA open process turnaround time is 1-2 weeks after all parties have agreed to and signed the contract.

How to open a DACA with Rho today

Reach out to your Client Service representative and ask for a DACA request survey. If you aren’t a current Rho customer and you are interested in the benefits of Rho’s business banking services, you can sign up to get started today.

Be sure to have your Lender's contact information on hand when filling out the survey.

Secondly, you will also need to upload your lending agreement (loan agreement with the Lender). 

Once the first two steps have been completed, our Rho DACA Team will send the Borrower & Lender parties our Springing DACA Template for review. Once we have confirmation that all parties agree to the template's terms, our team can send out the agreement for execution.

After the agreement is executed by all parties, Rho will set up the account, which takes 1 business day. Then you’re done!

FAQs about DACAs

What is a Deposit Account Control Agreement?

A Deposit Account Control Agreement is an agreement between a bank, a bank’s customer, and a third-party lender that helps the lender (a secured creditor) establish collateral over the bank’s customer, which is seeking to borrow funds. 

The terms of the agreement typically include covenants that outline how and when control over and disposition of the funds can be triggered. 

Other terms may include exculpation, indemnification and reimbursement, representations and warranties, and termination procedures. Please consult your attorney for a thorough review of the contract before agreeing to its terms.

Given their complexity, DACAs are generally written in line with guidelines set by the governing law, Uniform Commercial Code (specifically, UCC § 9-104)

What are the two types of DACAs? 

There are two types of Deposit Account Control Agreements used today that differ based on the control the secured party has over the movement of funds in the borrower’s depository account.

Active DACAs or blocked DACAs grant lenders the exclusive right and authority to debit and direct fund disposition without further consent from the borrower. 

A helpful illustration commonly used to describe active DACAs as a lockbox. Your bank or financial institution may hold the funds, but the lender has control over them. 

Passive DACAs or springing DACAs grant the customer (the borrower) the predominant right to instruct the disbursement of funds, changing only when a predefined event of default occurs. 

At such an event, typically outlined in a contract, lender control shifts from passive to active via written notice.

As we’ll discuss further in the post, Rho offers Passive DACAs (springing DACAs) in collaboration with our banking partner, Webster Bank, N.A., Member FDIC. Our platform makes it very easy for lenders and borrowers to facilitate the execution of DACAs with such notice. 

Let’s talk about why DACAs are used today, starting with lenders who are most likely to require them. 

When and why do business lenders use DACAs?

There are thousands of lenders that specialize in underwriting growth-stage businesses that want to access credit to fuel their growth but either can’t do so with their bank or prefer an alternative means. 

These third-party business lenders often require DACAs (sometimes referred to as “control of deposit accounts”) as a risk management tool. 

Think about it: If you’re a lender, you want some assurance that you can recoup some or all of the funds you lent in the event the borrower defaults. 

A bank lending to a depositor has an easier time managing risk because deposits are held at that institution. A third-party lender doesn’t have that luxury because a company’s bank likely requires them to hold deposits as a form of collateral and yield generation. 

This is where DACAs come in. With a DACA, a lender confirms a security interest in the debtor’s bank account, even if it is held at a bank separate from the lender. 

In the event of a default, a DACA allows the lender to restrict the debtor’s access to the funds in the account, making it possible for that lender to recoup funds from its initial loan. This drastically simplifies the default process, providing a level of certainty to lenders.

With DACAs, third-party lenders can more confidently provide capital to businesses looking for funding to fuel growth that may not otherwise secure similar lending terms from their primary bank. 

So, which businesses might consider using DACAs and why? 

When and why do businesses use DACAs?

DACAs are used by businesses that wish to secure credit from a third-party lender that isn’t their bank, and there are several reasons why they would: 

  1. They need more credit than a traditional lender or bank may be comfortable providing. Businesses that use DACAs may do so because a third-party lender is offering them more credit or better terms compared to their deposit-holding bank. 
  2. They may be in a critical growth period. High-growth businesses interested in scaling operations may need a sizable credit line to fund rapid expansion that is greater than what a bank is comfortable lending. 
  3. They may be a financially stressed or higher-risk business. With DACAs, businesses that are either higher-risk or have relatively low credit histories can gain greater access to credit than they otherwise would have. 
  4. They may not have a substantial credit history.. Unlike traditional banks, non-bank lenders often have flexible criteria for borrowing. They may focus on metrics or future prospects that banks do not consider, making it easier for high-growth businesses to secure the credit lines they need.
  5. Faster lending process: Application and approval processes can be faster with non-bank lenders, facilitating quicker access to capital. This swiftness is often essential for high-growth businesses needing to move quickly to capture market opportunities.

While DACAs are useful instruments for businesses seeking capital from third-party lenders, there are some challenges they may encounter in the process of securing one. 

Is setting up a DACA difficult?

Yes, it can be. There are a few hurdles businesses often must overcome to set up a DACA, including: 

  1. Lender negotiation: There is significant upfront negotiation that must be done with your lender before setting up the DACA. For example, the lender and borrower should agree separately on how to manage repayments and timing prior to opening a DACA. 
  2. Costs: Aside from costly attorneys’ fees, many banks charge an expensive implementation fee (can be as much as $5000) to set up a DACA. 
  3. Bank delays: A common complaint about the DACA process is that banks can be slow to respond to DACA requests, causing customer frustration. This makes sense when you consider the incentives involved – a third-party lender is potentially gaining access to the bank’s held deposits!

Note: It’s important to review your DACA security agreement very closely to ensure you have a full understanding of liability, disclosures, covenants, and terms of this agreement.

Wrap-up: Set up a DACA with Rho today

While Rho makes it easy to boost your bottom line and improve the efficiency of processes like accounts payable, we’re also proud to offer business banking services and customer support available 24H Mon-Fri, 10-7pm ET on weekends that helps businesses achieve more faster. 

If you are a business interested in working with a third-party lender and you need a DACA, Rho is happy to help. 

Speak with one of our Rho specialists today!

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Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC and its partner banks.