Understanding the Risks of Using Alternative Lenders.

By Thomas Tramaglini, Chief Operations Officer

The Center for MCA Research

thomas@beaconclientsolutions.com

About Thomas Tramaglini

The Simple Process of Funding

The process is uncomplicated. Brokers or alternative lenders ask for three months of business bank statements and a signed application. By doing so, you give them considerable control over you and your business.

Bank statements are packed with information that alternative lenders will use once their clients default. Here is some ammo you give lenders and brokers when you submit your application for funding.

What You Provide When Submitting Your File for Funding

• Sources of Income: You provide your sources of income, which lenders can access if you default.

• Personal Information: You share personal information, such as your social security number.

• Spending Habits: You disclose what you spend money on.

• Business Health: You inform the creditor how healthy your business is or is not.

• Banking Information: You give your banking information to the creditor and broker, meaning they can freeze those accounts.

• Processor Information: You provide the information of your processor(s).

  
  

Sources of Income

When you provide business bank statements to alternative lenders, you reveal all your income sources. If you default, the lender can identify who pays you and quickly send UCC 406 letters to those payers, freezing your funds. Once your funds are frozen, you are compelled to accept the payment terms set by the lender, or risk losing all frozen funds. This situation is never favorable. Additionally, due to UCC regulations, most alternative lenders are not required to negotiate with you unless you are prepared to declare bankruptcy or take legal action against the lender, if you can afford it.

Personal Information

By giving the alternative lender and broker your social security number, you allow these lenders to run your credit and conduct background checks using engines such as Clear. The alternative lender knows when you try to access more money or apply elsewhere, along with your credit history. Most alternative lenders and brokers do little to protect your personal information on secure servers.

Spending Habits

The creditor becomes aware of your spending habits. When negotiating a debt settlement, ensure your bank statements reflect only business expenses; otherwise, they could be used against you. For example, if you're spending on a car or a club membership, it might be leveraged to your disadvantage.

There's also a risk regarding which other accounts the business funds, such as personal or payroll accounts. When the UCC gets involved, almost everything is at risk, so it's important to be mindful of this.

Business Health

When you provide bank statements, you show how much money you make and how much you spend. This information is critical for negotiating payment plans or mediating trouble paying. If you are spending money on personal expenses, it will be used against you.

Banking Information

Bank statements tell the alternative lender who you bank with, and with that comes your account information. When you default, alternative lenders will quickly cut you off from your bank accounts. This situation weakens your negotiation stance and may force you to make a bad deal to get your bank account unfrozen. While alternative lenders typically need a judgment to take your money from the bank, they will pursue a judgment if they can.

Processor Information

When you give alternative lenders your bank statements, you provide them with information about your processors. This can be a deadly step for the small business owner. The bank statements reveal who processes your ACH or credit card payments. Once they have that information, it’s only a matter of time until the alternative lender sends UCC 406 letters to the processors, freezing your funds. Unlike banks, processors are ordered to send funds directly to collections without a judgment or even a lawsuit.

So What?

Overall, small business funders who collect bank statements think they are making sound decisions. However, they are often using a flawed, non-scientific method to gauge default risk. Most of the time, they lose. When defaults happen, their saving grace is that they have three months of information to pursue small business owners. I advise those considering alternative funding or who have defaulted to weigh the pros and cons of providing alternative lenders with their bank statements.

The Team at Beacon Can Help

The team at Beacon Client Solutions regularly works with clients who have been taken advantage of by MCA companies. Specifically, we assist business owners who have been burned.

The solution is simple. Get Help. Now

Dr. Thomas Tramaglini is the Managing Director and Negotiations Manager for Beacon Client Solutions, a company that supports small businesses on various fronts, especially MCA debt. I have been a small business owner for many years and have held leadership positions in several organizations and companies. I hold a B.A. in History, as well as a Masters and Doctorate in Organizational Leadership from Rutgers, 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 advice. Beacon has 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.