DACA’s meaning in banking

A Deposit Account Control Agreement (DACA) is a tri-party agreement between a borrower (the startup or business), a lender (the secured creditor), and the bank that holds the borrower’s deposit account. Its core purpose is to allow a lender to perfect its security interest in the borrower’s deposit account. This might sound like legal jargon, but for a growing company, it translates into a powerful benefit: Access to capital.

1. The Foundation of Secured Lending

When a lender provides non-dilutive financing—like a venture loan or a line of credit—they need assurance that they can recover their funds if the borrower defaults. The lender often takes a security interest in the company’s assets, and one of the most liquid and valuable assets is the cash in its deposit accounts.

• Perfecting the Interest: Under the Uniform Commercial Code (UCC), a lender must establish “control” over the deposit account to have a legally enforceable, first-priority claim on the funds. The DACA is the mechanism that grants this control. Without a DACA, the lender’s claim on the cash may be secondary to other creditors or trustees in bankruptcy, making the loan significantly riskier.
• Reduced Lender Risk = Better Terms for You: By allowing the lender to perfect their security interest with a DACA, the business substantially mitigates the lender’s risk. Reduced risk for the lender often translates directly into more favorable loan terms for the borrower, such as a lower interest rate, a larger principal amount, or a longer repayment period.

2. Operational Flexibility with a “Springing” DACA

There are two primary types of DACAs:

Blocked (Active) DACA

The lender has exclusive control over the account from day one. The borrower needs the lender’s permission for nearly every transaction, which is highly restrictive.

Springing (Passive) DACA

This is the most common and favorable type for startups. The borrower retains full, day-to-day control over the account. The lender’s control springs into effect only if a specific event of default (a “trigger event”) occurs, such as a missed payment.

The Springing DACA is the key benefit for a growth-focused business. It provides the lender with the necessary safety net while ensuring the startup’s cash flow and day-to-day operations remain uninterrupted. You can continue to pay employees, vendors, and invest in growth without the lender’s constant oversight.

 

3. Streamlined Default Process

In the unfortunate event of a default, the DACA simplifies and speeds up the process for the lender to recover the outstanding loan balance. Instead of lengthy court battles to seize assets, the DACA allows the lender to quickly take control of the deposit account and apply the funds to the debt. For the lender, this immediate remedy avoids costly collection efforts and provides financial certainty. For the borrower, it creates a transparent agreement where the consequences of default are clearly defined upfront.

 

Why Choose Arc for Your DACA Account

Arc is a financial technology platform built specifically for venture-backed startups. For companies already using Arc for other financial services, choosing them for a DACA account can offer distinct advantages over a traditional bank.

 

1. Speed and Simplicity Tailored for Startups

Traditional banks can be notoriously slow and rigid when it comes to legal agreements like DACAs. They often use boilerplate contracts that require significant time and legal fees for review and negotiation.

• Standardized Agreements: Arc, operating as a modern fintech, often uses standardized DACA documentation specifically designed for the common scenarios of a venture-backed startup. This standardization significantly accelerates the legal review and signing process, allowing the business to access its loan proceeds faster.
• A Unified Platform: If you’re already managing your operating cash, runway analytics, or non-dilutive financing (like Arc’s own credit products) through their platform, consolidating the DACA with them creates a single, integrated view of your financial ecosystem. This eliminates the need to coordinate between a separate bank, your lender, and your own finance team.

 

2. Deep Understanding of Venture Lending

Arc’s entire business model is centered on the needs of high-growth technology companies and the venture ecosystem.

• Familiarity with Terms: Arc understands the language and structure of venture debt and credit facilities better than a general-purpose commercial bank. This familiarity allows for a smoother, less frictional DACA process because they are accustomed to working with the specific types of lenders and legal counsel common in the startup world.
• Operational Alignment: Arc is designed to support the dynamic nature of a startup’s cash flow. Their systems are built to handle the passive/springing DACA structure effectively, ensuring that a triggering event—if it occurs—is handled swiftly and correctly, minimizing ambiguity or operational confusion for all three parties (borrower, lender, and Arc).

 

3. Focus on Non-Dilutive Capital

For a startup, non-dilutive capital is highly valuable—it provides funding without sacrificing equity. A DACA is the necessary bridge to securing that capital from a third-party lender. By facilitating the DACA process, Arc enables startups to unlock this crucial funding source.

• Capital Markets Integration: Arc often has an integrated “Capital Markets” function, connecting lenders with pre-qualified startups. For lenders, Arc offers standardized DACA agreements as part of its infrastructure, making the lending process to Arc customers more appealing and efficient. This integration can act as a lubricant, making it easier and faster for an Arc-using startup to be matched with a willing lender.

 

In short, a Deposit Account Control Agreement (DACA) is not just a piece of legal paperwork; it’s an enabler of growth for any business seeking secured financing. It provides the necessary comfort to a lender to offer capital on attractive terms, all while a Springing DACA ensures the business maintains its operational freedom. Choosing a platform like Arc simplifies this essential process by offering speed, standardization, and a deep, specialized understanding of the startup financial landscape, allowing founders to focus on building their company, not managing complex banking bureaucracy.