What alternative lenders take and use from your bank statements if you have trouble making their payments.

One of the most common requirements from alternative lenders when arranging funding for small business owners is three months of business statements. These bank statements are used by alternative lenders to determine approvals and funding. However, if small business owners struggle to repay the alternative lender, the lenders use the Uniform Commercial Code (UCC) to pursue the business owner. By employing liens and actions permitted under the UCC, alternative lenders utilize information from the bank statements provided by business owners to collect. This article discusses various details that small business owners share with alternative lenders through their bank statements.

By Thomas Tramaglini, Chief Operations Officer

The Center for MCA Research

thomas@beaconclientsolutions.com 

About Thomas Tramaglini

"All we need is an application and 3 months of your business bank statements for funding."

The process is straightforward. Brokers or alternative lenders request three months of business bank statements along with a signed application, which grants them extensive authority over your actions.

However, your application and bank statements contain information they want beforehand because if you encounter difficulties in paying them, they will use what you provide to pursue you further.

Brokers and their lenders ask for business bank statements to underwrite your alternative loan/merchant cash advance because they do not know any better. They actually do not know.

When it comes to hedging risk for purchasing future receivables (or funding), bank statements offer a simple method for underwriters to evaluate variables like average daily revenue and the number of deposits to determine if a business qualifies for funding.

However, the reality is that using the number of deposits, average daily revenue, or even the number of negative days from bank statements cannot accurately predict whether someone will default. In fact, relying on bank statements to assess funding risk is ineffective. We must be honest about this.

The majority of those managing alternative lending transactions are not financial experts, and they are aware of this. No one, not even those gambling in Vegas, would engage in a game they believe is calculated if the odds of success are below 50%.

Banks enjoy the nearly 100% repayment likelihood of SBA and business loans because they understand underwriting and the most precise methods to assess risk, using metrics like annual profit on taxes and the debt service coverage ratio (DSCR).

Most funders, such as MCA shops, are unfamiliar with DSCR and how to calculate the minimal metrics needed to protect small business owners and their own investments.

Bank statements are filled with details that alternative lenders will utilize if their clients default.

Although relying on bank statements to assess funding risk is not advisable, they contain valuable insights that can assist in collections when small business owners fail to meet their obligations.

Hand over your statements, and a clear disaster is on the horizon.

5 things you reveal to alternative lenders when you share your bank statements.

1 - You disclose your income sources.

By submitting your business bank statements to alternative lenders, you reveal all your income sources to them. If you default, the lender can identify who pays you and promptly send UCC 406 letters to those payers, freezing your funds. Once your funds are frozen, you're compelled to comply with the lender's demands (or risk losing all frozen funds), which is rarely beneficial. Moreover, due to UCC regulations, most alternative lenders aren't obligated to negotiate with you unless you're on the brink of filing for bankruptcy or are prepared to take legal action, if financially feasible.

2 - You reveal your spending habits to the creditor.

The creditor gains insight into your spending habits. When negotiating debt reconciliation, it's crucial to present bank statements reflecting only business expenses, as any personal expenses can be used against you. For example, expenditures on a car or club membership could be detrimental.

Additionally, there's exposure regarding other accounts the business transfers money to, such as personal or payroll accounts. With UCC involvement, almost everything is subject to scrutiny, so it's important to be aware of this.

3 - You indicate the financial health of your business to the creditor.

Providing bank statements reveals how much you earn and spend, which is crucial for negotiating payment plans or addressing payment difficulties. Furthermore, as mentioned earlier, spending on items like fast food or personal expenses can be used against you.

4 - You provide your banking details to the creditor.

Bank statements reveal which bank you use, along with your account details, to the alternative lender. If you default, these lenders can swiftly restrict access to your bank accounts. This weakens your negotiating position and may lead you to accept unfavorable terms to unfreeze your account. Although alternative lenders typically require a judgment to withdraw funds from your account, they will obtain one and seize your money if possible.

5 - You disclose your processor(s) information.

By providing your bank statements to alternative lenders, you also reveal who your processors are. This can be a critical mistake for small business owners. The statements indicate who handles your ACH or credit card transactions. With this information, alternative lenders can quickly issue UCC 406 letters to the processors, freezing your funds. Unlike banks, processors are instructed to send funds directly to collections without needing a judgment or lawsuit.

Why does this matter?

In general, small business funders who rely on bank statements believe they are making informed decisions, but ultimately, they are employing a flawed and unscientific method to assess default risk. More often than not, they incur losses. When defaults occur, their fallback is having three months of information to pursue small business owners. We recommend that those considering alternative funding or who have defaulted weigh the advantages and disadvantages of sharing their bank statements with alternative lenders.

The Team at Beacon Can Assist.

The team at Beacon Client Solutions frequently assists clients who have been exploited by MCA companies, particularly those business owners who have been adversely affected.

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 a host of fronts, especially MCA 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, 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 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.