This article examines five things a business owner gives away when they provide three months of their business bank statements to an alternative lender or broker. Business owners should be vigilant that once they have given a lender these things, the lender can and will use that information to go after them if they have trouble paying or default.

1. Statements Reveal Your Source of Revenue;

2. Statements Reveal Where Your Money Goes;

3. Statements Reveal the Financial Health of Your Business;

4. Statements Reveal Your Banking Relationships;

5. Statements May Reveal Your Payment Processors and Other Revenue Channels;

That is, lenders can use this information to freeze your bank accounts, credit card processor, redirect funds from your payers, and more.

By Thomas Tramaglini, Chief Operations Officer

thomas@beaconclientsolutions.com

About Thomas Tramaglini

When a small business owner applies for financing from an alternative lender, one of the first requests is often straightforward:

“Send us three months of your business bank statements.”

It sounds routine. In the alternative lending industry, it has become almost standard procedure.

Alternative lenders and brokers use bank statements to evaluate revenue, deposits, cash flow and other characteristics of a business. For a prospective borrower, however, those statements contain far more information than simply how much money the business generates.

They can reveal customers, payment processors, operating expenses, other bank accounts, existing financing relationships and the overall financial condition of the business.

That information may be particularly important if the business later defaults.

A lender with a properly documented security interest may have collection and enforcement rights under Article 9 of the Uniform Commercial Code (UCC), depending on the transaction, the collateral covered by the agreement, applicable state law and whether the lender has satisfied the necessary legal requirements. For example, UCC § 9-607 permits a secured party, after default and subject to the applicable requirements, to notify an account debtor or another person obligated on collateral and direct payment to the secured party.

That means the information voluntarily provided during underwriting can potentially become valuable information later in a collection dispute.

1. You Reveal Your Source of Revenue

Your bank statements can identify where your business receives money.

They may show payments from customers, marketplaces, payment processors, third-party platforms and other sources of revenue. For an underwriter, this information can help establish the company's cash flow.

But that same information can become significant after a default.

Depending on the financing documents and applicable law, a secured creditor may have rights to notify an account debtor or another party obligated on collateral and seek payment directly from that party. UCC § 9-406 addresses the effect of notification to an account debtor when an account or other covered payment right has been assigned.

In practical terms, the lender may already know who is paying your company because you provided the bank statements during the underwriting process.

That does not mean a lender can simply freeze every source of revenue whenever it wants. The lender's rights depend on the actual transaction documents, the collateral granted, perfection, default, applicable law and procedural requirements.

Nevertheless, business owners should understand the significance of voluntarily providing this information.

2. You Reveal Where Your Money Goes

Bank statements don't just show revenue.

They show expenditures.

A lender may see payroll, rent, equipment payments, insurance, taxes, advertising, credit-card payments, transfers, loan payments and numerous other business expenses.

Depending on the circumstances, statements can also reveal transfers between business and personal accounts or payments to other financial obligations.

This information can become relevant when a business is attempting to renegotiate its obligations.

A business owner seeking a modification, settlement or payment arrangement should be prepared to explain the company's actual financial condition. Statements that show substantial discretionary spending while the business claims it cannot meet its contractual obligations can complicate negotiations.

That is one reason business owners should maintain accurate records and keep business and personal finances appropriately separated.

3. You Reveal the Financial Health of Your Business

Three months of bank statements can provide a remarkably detailed snapshot of a company's financial condition.

They may show:

• Average deposits

• Revenue fluctuations

• Negative-balance days

• Existing debt payments

• Cash-flow shortages

• Large or unusual expenditures

• Transfers between accounts

• Seasonality

• Payment patterns

Alternative lenders frequently use these factors to make underwriting decisions.

The question is whether those factors actually provide a reliable measure of default risk.

Bank-statement underwriting can be useful for evaluating cash flow, but cash flow alone does not tell the entire story of a business. Two companies with identical monthly deposits can have dramatically different profitability, margins, fixed expenses, tax obligations, leverage and ability to service debt.

Traditional lenders often consider broader financial information, including tax returns, financial statements, profitability and debt-service metrics such as the Debt Service Coverage Ratio (DSCR).

The important point is simple:

Revenue is not the same thing as profit, and deposits are not the same thing as free cash flow.

A business can generate substantial revenue and still be financially distressed.

4. You Reveal Your Banking Relationships

Your bank statements identify the financial institution where your business maintains its account.

They may also expose account numbers, routing information and transfers involving other financial institutions or accounts.

This information can become relevant in collection proceedings, particularly when a creditor has obtained the legal authority necessary to enforce a judgment or has contractual and statutory rights applicable to a particular account or collateral.

However, it is important to distinguish between a UCC financing statement and the actual ability to seize money from a bank account.

A UCC filing does not automatically give a creditor unrestricted access to every bank account belonging to a business.

Under UCC Article 9, control of a deposit account is governed by specific requirements. For example, New York's current UCC § 9-104 identifies circumstances in which a secured party has “control” of a deposit account, including certain agreements involving the debtor, secured party and bank.

And UCC § 9-607 addresses collection and enforcement involving deposit accounts when the statutory requirements are satisfied.

The distinction matters.

A UCC lien is not a magic button that allows a lender to immediately take money from every bank account a business owns.

The lender still has to comply with the applicable legal framework.

5. You May Reveal Your Payment Processors and Other Revenue Channels

Modern businesses frequently receive money through payment processors, merchant accounts and online platforms.

Bank statements can help identify those relationships.

This can become important following a default because UCC Article 9 provides mechanisms for a secured party to notify persons obligated on covered collateral and seek payment under certain circumstances.

UCC § 9-607 specifically permits a secured party, subject to the statute and the underlying agreement, to notify an account debtor or another person obligated on collateral to make payment to the secured party.

Similarly, UCC § 9-406 provides rules concerning notification of an assignment and when an account debtor may discharge its obligation by paying the assignee rather than the original business.

But again, the details matter.

A payment processor is not automatically required to turn over every dollar belonging to a business simply because a lender sends a letter. The lender's rights depend upon the nature of the collateral, the financing agreement, the applicable UCC provisions, the processor's obligations and other applicable law.

Business owners should therefore be wary of simplistic claims that a UCC filing alone allows a lender to “freeze everything.”

So What?

The request for three months of bank statements may appear routine, but it is one of the most information-rich documents a small business owner provides during an alternative financing transaction.

Those statements can tell a lender:

• Who pays you.

• Where you bank.

• How much money comes in and how much money goes out.

• What your major expenses are.

• Who processes your payments.

• Whether you have other financing obligations.

• And how your business is performing financially.

None of this means that providing bank statements is inherently wrong.

Alternative lenders need information to evaluate transactions. Bank statements can provide useful information about a company's cash flow, and many businesses would not qualify for conventional financing without some form of alternative underwriting.

The problem arises when a business owner does not understand what information is being provided, why it is being requested, and how that information could potentially be used later.

The Bigger Issue: Understand the Contract Before You Sign It

The bank statements themselves are only part of the equation.

The more important document may be the financing agreement the business owner signs.

Before accepting an MCA, revenue purchase agreement or other form of alternative financing, a business owner should understand:

• What exactly is being purchased or financed?

• Is there a personal guarantee?

• What collateral is being granted?

• Is there a blanket UCC security interest?

• What assets are covered?

• What constitutes a default?

• Are there confession-of-judgment provisions or other remedies?

• What happens if revenue declines?

• Are reconciliation rights actually available?

• What happens to ACH withdrawals following a default?

• What rights does the funder have against accounts receivable or other payment streams?

• What state law governs the agreement?

• What happens if the business stops making payments?

These questions are considerably more important than simply asking, “How much money will I receive?”

The Bottom Line

Alternative financing can provide critically important capital to businesses that cannot obtain conventional bank financing.

But speed and accessibility come with a price: the underwriting process can require a business owner to disclose a significant amount of financial information and agree to contractual remedies that may become extremely important if the business later experiences financial difficulty.

Business owners should not assume that a UCC filing automatically gives a lender unrestricted access to their bank accounts or revenue. At the same time, they should not underestimate the information contained in the financial records they provide.

Before sending three months of bank statements or signing an alternative financing agreement, understand exactly what you are giving the lender—and exactly what rights you are giving the lender if the business cannot perform under the agreement.

The Team at Beacon Client Solutions Can Help

Beacon Client Solutions works with small business owners dealing with alternative financing, MCA obligations, UCC issues and financial distress.

For business owners who are considering alternative financing—or who have already entered into an agreement and are having difficulty meeting their obligations—the most important step is to understand the documents, the potential remedies and the options available before the situation escalates.

Contact Beacon Client Solutions to better understand your situation and how we can help you.

Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, an award-winning company that supports small businesses in multiple areas, especially business debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.

Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.