Bank Statement Analysis

Bank statement analysis is the review of a borrower's bank statements to see how much money the business really brings in and how well it manages that money. Underwriters use it to check revenue, spot cash shortfalls and find debts that don't appear on a credit report. It is a core part of cash flow underwriting and the main tool of merchant cash advance (MCA) funders.

Most lenders review several months of business statements. They look at:

• True revenue. Total deposits, minus anything that isn't sales, such as transfers between the owner's accounts, loan proceeds or refunds.
• Balances. The average daily balance and the lowest point each month.
• Negative days and overdrafts. How often the account dips below zero.
• Returned items. Payments that bounced for non-sufficient funds (NSF).
• Existing debt. Loan payments and daily or weekly debits from other funders.
• Trends. Whether revenue is growing, flat or falling, and whether it's seasonal.

The work can be done by hand or by software that reads the statements, or pulls the data through a bank connection, and sorts each transaction.

Why it matters for lenders

Bank statements are harder to fake than a revenue figure typed on an application, though not impossible. Comparing statements against tax returns and data pulled straight from the bank helps catch altered documents.

Statements also show debt that a credit report misses. MCAs and some short-term business loans often don't report to credit bureaus. The only clue may be a fixed daily debit. Missing it leads to stacking, where a business takes on more payments than it can handle.

Finally, statement analysis sets the size of the deal. Many small business funders base the amount on monthly true revenue, adjusted for existing debt and how healthy the balances are.

How it works in practice

An underwriter at a small business funder receives four months of statements from a plumbing company. Deposits total about $80,000 a month. But $15,000 each month is a transfer from the owner's personal account, so true revenue is closer to $65,000.

She also finds a $400 daily debit from another funder and three ACH returns for non-sufficient funds in the last month. The average daily balance has fallen each month. She lowers the offer and adds a stip asking for the other funder's payoff balance.

Done by hand, this takes about an hour per file, and two underwriters may read the same file differently. With software that sorts the transactions, she can spend that hour on judgment instead of arithmetic.