What is a deposit account control agreement (DACA)?

Why lenders need control of your bank accounts

Most business lenders take a lien on everything the business owns, perfected by filing a UCC-1 financing statement. A filing works for equipment, inventory and receivables. It does not work for bank accounts. Under Article 9 of the Uniform Commercial Code, a security interest in a deposit account as original collateral can be perfected only by control. Without control, the lender's lien on the account is unperfected, which means it can lose to a bankruptcy trustee or to another creditor who does have control.

There are three ways a lender gets control:

• It is the bank. A bank that holds the account has control automatically. This is why many banks require borrowers to move their operating accounts to them.
• A control agreement. The bank holding the account agrees, in a signed document, to follow the lender's instructions about the account without further consent from the business. That document is the DACA.
• The lender becomes the account holder. The account is put in the lender's name. This is rare outside of specific cash collateral accounts.

The lender's lien does reach cash that comes from its other collateral, such as customer payments on its receivables, as proceeds. But once those payments are mixed with other money in an account, tracing them becomes a contest of accounting rules and litigation. A DACA avoids that argument: the lender has a perfected lien on the whole account, whatever the source of the money in it.

Springing versus full control

Every DACA gives the lender the legal right to instruct the bank. What differs is when it exercises it. The distinction matters far more to how the business runs than the existence of the agreement.

A springing DACA gives the lender the power without using it. Under most forms, the bank will act on a notice of exclusive control without checking whether the lender was entitled to send it. The business's protection lies in the loan agreement, which should say the lender will send notice only after an event of default or a defined trigger, such as excess availability falling below a set level. If that promise is missing or vague, the springing DACA is, in practice, a full one the lender has chosen not to use yet.

A full DACA is the mechanism behind cash dominion. Customer payments land in a collection account; the bank sweeps it to the lender each business day; the lender applies the money to the revolver; the business draws what it needs into an operating account. For how that affects daily cash management, see cash dominion and lockboxes.

When your accounts stay at your own bank

DACAs exist because borrowers do not always move their banking to the lender. There are good reasons not to: the lender may be a private credit fund or non-bank asset-based lender with no deposit business; the business may have treasury services, merchant processing or payroll integrations it does not want to rebuild; or it may bank in several places for operational reasons. See bank vs non-bank ABL.

Keeping accounts where they are has costs that owners should expect:

• The depositary bank must agree. It is not obliged to sign, and most banks insist on their own form. The lender's counsel then negotiates it with the bank's counsel.
• The bank charges for it. Setup and maintenance fees for control agreements are common, and they fall on the borrower.
• It can hold up closing. Where a bank will not sign in time, lenders often allow the DACAs as a post-closing obligation, with a deadline in the loan agreement. Missing it is a default, so the deadline needs to be realistic.
• Every account in scope needs one. A business with accounts at three banks signs three DACAs, and any new account opened later needs one too.

Moving the operating accounts to a bank lender removes the DACA for those accounts, because the lender has control automatically. It also gives the lender a right of setoff against them, which some owners prefer to avoid. Neither route is wrong; the choice should be made early, so the closing checklist reflects it. See conditions precedent.

What is inside a DACA

Bank forms differ, but most cover the same ground. The points that matter to the borrower and the lender:

Two practical points follow. First, a DACA does not make the bank monitor the loan. The bank follows instructions; it does not decide whether the lender is entitled to give them. Second, where a business has two secured lenders, such as an asset-based revolver and a term loan, the DACA and the intercreditor agreement together decide which lender may give instructions and when. See how an ABL and a term loan share collateral.

Which accounts are covered, and which are excluded

Lenders want control over every account where their collateral's proceeds land and every account that holds meaningful cash. Borrowers want to limit the paperwork to what matters. The usual compromise is a list of excluded accounts in the loan agreement:

• Payroll accounts, funded just ahead of each payroll and holding only what is owed to employees.
• Trust, escrow and fiduciary accounts holding money that belongs to others, such as customer deposits held in trust or client funds.
• Tax accounts holding withheld payroll or sales taxes.
• Zero-balance accounts that sweep daily into a covered account.
• Small accounts, below a balance set in the agreement, individually and in total.

Brokerage and investment accounts are a different category under the UCC. The equivalent document there is a securities account control agreement, signed with the broker or custodian. Many loan agreements require both kinds.

Negotiate the excluded-account list and the notice trigger in the loan agreement. The bank's DACA form will not protect you on either.

Planning for DACAs in a financing

The practical work is early and administrative. A debt schedule and a list of every bank account, with its bank, purpose and typical balance, lets the lender set the account requirements in the term sheet rather than at closing. Businesses coming off a bank relationship should also check that the old lender's control agreements are terminated at payoff; a DACA left in place gives a paid-off lender instructions over your account. The payoff letter should cover it, alongside the UCC-3 termination.

For asset-based lines, cash control is part of the product rather than a negotiable extra. Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines. They differ on whether they require the operating accounts to move to them, whether they insist on full control from closing or accept springing control, and what they exclude. Transparent's lender package sets out the account structure alongside the borrowing base, so those differences show up in the term sheets and can be compared.