5 Ways that Alternative Lenders Use Your Business Bank Statements to Come After You.
- Thomas Tramaglini
- Mar 24
- 5 min read
Perhaps the most common thing that alternative lenders ask for when preparing funding for small business owners are three months of business statements. Alternative lenders use these bank statements to drive approvals and funding. However, when small business owners begin to have trouble paying back the alternative lender, alternative lenders use the Uniform Commercial Code (UCC) to go after the small business owner. And, using liens and actions allowed under UCC, alternative lenders use information from what business owners provide in their bank statements to collect. This article describes different things that small business owners give alternative lenders when they provide their bank statements.
By Thomas Tramaglini, Chief Operations Officer
The Center for MCA Research
Send us 3 months of your business bank statements.
The script is simple. Brokers or alternative lenders ask for three months of business bank statements and a signed application giving the broker or alternative lender to pretty much do anything they want to you.
Why do alternative lenders ask you for your bank statements? Because most alternative lenders just do not get it. Literally.
When it comes to hedging risk for purchasing your future receivables (or funding), using bank statements are an easy way for those who are underwriters (who think they are) to examine and use variables such as average daily revenue and number of deposits to gauge whether a business is going to qualify for funding.
The truth is that in no way can using the number of deposits, average daily revenue, or even the number of negative days identified in bank statements predict in an accurate fashion whether or not someone will default. In fact, using bank statements to gauge funding is a terrible way to analyze risk. However, we should be honest.
The majority of those who control alternative lending transactions are not finance gurus. And they know it. Because no person, not even those who go to the tables in Vegas will play a game they think is calculated if the probability for success is below 50%.
Banks relish in the nearly 100% payback possibility of SBA and business loans because they understand underwriting and most precise ways to gauge risk, such as by using metrics such as annual profit on taxes and debt service coverage ratio (DSCR).
Most funders such as MCA shops have no idea what DSCR is and how to calculate minimal metrics which would protect small business owners and their own money.
Bank statements are packed with information which alternative lenders will use once their client's default.
While using bank statements are an incredibly bad thing use to gauge risk in funding, bank statements contain gems which can aid in collections when small business owners default.
Give them your statements and a blatant disaster is looming.
5 things you give alternative lenders when you give them your bank statements.
1 - You provide your sources of income.
By providing business bank statements to alternative lenders, one gives the alternative lender all of their sources of income. So, once you default, the alternative lender will check who pays you and immediately sends those payers UCC 406 letters restraining your funds. Once those funds are froze, you are basically roped into accepting what the alternative lender makes you pay (or you lose all funds frozen) which is never good. Further, because of UCC rules, most alternative lenders do not have to negotiate with you until you are either in submission and ready to file bankruptcy or take the lender to court, if you can afford it.
2 - You tell the creditor what you spend money on.
The creditor knows what you spend money on. When you are making a deal to reconcile debt, you better have bank statements which have only business expenses on it or it can be used against you. For instance, if you are paying money on a car or membership to a club, they will use that to drive you into the ground.
There is also exposure on what other accounts the business is sending money to like personal accounts, payroll accounts, and more. When UCC comes a calling, everything is pretty much up for grabs so one should be cognizant of this.
3 - You tell the creditor how healthy your business is or is not.
When you provide bank statements, you show how much money you make and how much money you spend. Overall, this is a critical part of negotiating payment plans or mediating trouble paying. Further, as mentioned above, if you are spending money on things like Burger King and personal expenses it will be used against you.
4 - You give your banking information to the creditor.
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. Again, this will make your negotiation stance one of weakness and overall cause you to make a bad deal to get your bank account unfrozen. And while alternative lenders in most cases need a judgement to take your money from the bank, they will get a judgement and take your money if they can.
5 - You provide the information of your processor(s).
When you give alternative lenders your bank statements you provide them who your processors are. This can be another deadly step for the small business owner. The bank statements tell the alternative lender who processes your ACH or credit card payments. Once they have that information, it is only a matter of time until the alternative lender sends UCC 406 letters to the processors which freeze your funds. And unlike banks, the processor are ordered to send funds directly to collections without a judgement or even a lawsuit.
So what?
Overall, small business funders who collect bank statements think they are making sound decisions but in the end, they are just using an awful non-scientific way of gauging risk for default. Most of the time they lose. And when defaults happen, their saving grace is that they have three months of information that they can use to go after small business owners. We advise those are considering alternative funding or who have defaulted to consider the pros and cons of providing alternative lenders 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, those business owners who have been burned.
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.
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