Why Factor Companies Will Request Bank Statements From Their Clients

When applying for business funding, you’ll need to provide supporting documentation as part of the application and due diligence process no matter the type of financing. One item lenders and alternative funding sources, such as factoring companies, will request is your company bank statements. 

Bank statements play an important role if you are looking to get business funding which may come as a surprise to many business owners.

If you’re looking to understand how bank statements impact the application approval process for new clients and the ongoing due diligence process, then this blog is for you. 

Using Bank Statements to Evaluate Applications

During the initial underwriting process, factoring companies (“factors”) will request and review your bank statements to determine if you meet their qualification requirements to become a new client.

Bank statements provide a track record of your business activity and are used to confirm the validity of the information in your application as well as supporting documents. 

The sections of the bank statements that will be evaluated include:

• Business name and address, account number, and type – making sure it’s not a personal bank account and verify that they are the same as the information on the application.
• Average daily balances – to verify what the prospective client is telling the factoring company makes sense or is unrealistic or possibly fabricated. Factors also look for instances of insufficient funds and assess the financial health of the prospective client and whether there is a going concern risk. An occasional NSF may be acceptable, but frequent NSFs usually indicate a serious problem.
• Financial history – to confirm that information lines up with forecasts. For example, if a prospective client is projecting $10 Million in annual revenues, however, their average bank balance is $10,000, and deposits for the previous year were only $60,000, this may be a red flag. It may also indicate that the transaction may not be worth the factor’s time or indicate potential fraud. In either case, the factoring company may discontinue the due diligence and underwriting process.
• Daily deposits – to look for unusual transactions that may indicate undisclosed information or illegal or fraudulent transactions. They may also be used to confirm the dates and amounts of payments by the client’s customer (aka “account debtor”).
• Recurring payments/ automatic withdrawals – to verify that there are no undisclosed loans, other material financial obligations, or improper payments. Recurring withdrawals may indicate the business is repaying pre-existing debt or that prior business funding or financing is already in place.  It may also identify automatic payments taken for judgments or tax payments.  This is especially important in determining if the prospective client has not disclosed previous funding (which may include merchant cash advances), tax liens, or judgments.

Bank statements can help to identify potential red flags, such as the account being recently opened, low account balances, and the business name and address not lining up.  Verification ensures the name of the client matches the name on the account with cash coming in and out and reduces the risk of fraud. Bank statements can also identify instances where funds may have been misappropriated and used outside the general scope of the business.  For example, if a staffing company has expenditures for a pool installation, this may indicate misappropriation of the company’s funds. 

Bank statements are used to help factors verify that a client is not a fraud risk or that they will one day disappear and default on their financial obligations. 

Can a Business Obtain a Factoring or PO Financing Facility Without Providing Bank Statements? 

No, that is not likely.  It will be difficult for business owners to find funding sources that do not have bank statement requirements. By having a business bank account and providing this information to the factor, you will be able to start building trust and create financial transparency for your business.  Factoring companies will want to see this when they are evaluating you as a client. 

Bank statements should indicate your company is healthy and consistent in the way it conducts business. NSFs should be the exception, not the rule. Average daily balances and deposits should be commensurate with the amount of business you are doing. Payments should be consistent with the nature of your business and the sources of your funding, leases, and service providers. Your business history and bank statement activity should support the assumptions in your business plans and the amount of funding that you are requesting.

Ongoing Due Diligence Using Bank Statements 

Due diligence is part of a healthy ongoing relationship between a factor and a client. After a client is approved for invoice factoring or a PO financing facility, circumstances may change. Economic recessions, natural disasters, geopolitical events, pandemics, and other events can negatively impact a client’s business and financial health. 

Factoring companies use a number of resources to monitor a client relationship on an ongoing basis, including the review of bank statements. Keeping track of clients helps to ensure a healthy factoring relationship and alert factors to situations that may require actions to help the client. 

Bank statements will help the factor determine if the client is in compliance with the covenants of their facility.  For example, a factor may check to see if the client is misdirecting payments (pocketing payments that are meant for the factoring company) or if they are not submitting all their invoices as required under the factoring agreement.  They can be used to monitor for unapproved or undisclosed junior financing/ debt taken out by the client, which may impair the factoring company’s collateral.  For example, merchant cash advances are typically repaid through recurring payments. 

Bank statements will be used to determine if the client is misappropriating funds for the company, especially advances provided by the factor company.  For companies in the construction industry, this is particularly important as there are trust fund laws that govern what a business can do with proceeds.  Typically, contractors will need to pay payroll, taxes, subcontractors, material and service providers, and other vendors that provided work to a particular worksite and may have lien rights. 

Due diligence is an initial and ongoing process of reviewing a client’s financial, legal, and other critical business information to ensure a healthy factoring relationship. Bank statements are a key tool used for this process. Capstone has experienced personnel who will work with you to be sure the qualification, due diligence, and onboarding processes are handled efficiently every step of the way.  Please contact a Capstone representative today to see how we can help you achieve your business funding objectives.