A bank statement loan expense factor is the share of a business account's deposits that a lender treats as costs, not income. The lender multiplies qualifying deposits by the rest. A 50 percent factor keeps half the deposits as income. The lender sets the factor, either as a fixed figure or from a CPA letter.
What is a bank statement loan expense factor?
An expense factor is a percentage subtracted from a business account's qualifying deposits to estimate the borrower's income. Deposits are revenue, not profit. The factor stands in for rent, supplies, payroll, fuel and the other costs the statements do not separate.
A tax return shows expenses line by line. A bank statement program has no return, so the lender has to estimate. The expense factor is that estimate, applied to the qualifying deposits after transfers and one-time credits are taken out.
How the factor enters the calculation
The factor is applied after exclusions and before the division by the lookback. With $198,000 of qualifying deposits, a 40 percent factor leaves $118,800, and a 12 month lookback gives $9,900 a month. The full sequence is laid out in the income verification walkthrough, which also shows why the order of steps matters.
Where it does and does not apply
The factor is a business account tool. Deposits to a personal account are generally counted without it, because they are not business revenue. Lenders differ, and a program that accepts personal statements may still ask for a business license or a letter. Read the matrix for the program before you assume.
Who sets it
The lender sets the factor in its program guidelines, and the borrower cannot negotiate it on a given file. The borrower can change which factor applies by supplying a letter from a tax professional, covered below. This post does not quote a standard rate, because there is none across lenders.
Fixed expense factors by business type
A fixed expense factor is a percentage the lender applies to every borrower in a business category, with no documentation of the borrower's actual costs. Some lenders use one factor for all businesses. Others publish a table by industry, because a consultant spends less to earn a dollar than a trucker does.
The fixed factor is the default. It applies unless the borrower offers something that replaces it.
Example factors on $20,000 of deposits
The factors in this table are examples to show the arithmetic. They are not any lender's published rates. Check the program you are placing for the real figures.
| Business type | Example factor | Income kept | Monthly income on $20,000 of deposits |
|---|---|---|---|
| Consulting | 30% | 70% | $14,000 |
| Retail | 60% | 40% | $8,000 |
| Trucking | 70% | 30% | $6,000 |
The same $20,000 of monthly deposits produces $14,000, $8,000 or $6,000 of income. The choice of factor changes the outcome more than almost any other input. A broker who does not know the business type in advance cannot say what the borrower qualifies for.
Why industries differ
Cost structure drives the spread. A consultant's main cost is time. A retailer buys inventory before selling it. A trucker pays for fuel, maintenance, insurance and equipment. Lenders choose factors that roughly track those differences. Where a business fits between categories, the lender decides which row applies, and the broker's description of the business matters.
Deposits that carry a cost before they arrive
A payment processor or marketplace may pay out net of fees, so the deposit is already lower than the sale. A lender may still apply the factor to the net deposit. Ask whether the program does, since applying both a fee reduction and a full factor makes the income lower than the business earned.
CPA expense ratios versus the default expense factor
A CPA expense ratio is a percentage stated in a letter from a CPA or other tax professional who has reviewed the business, and a lender may accept it in place of the fixed factor. If the real costs are lower than the default, the letter raises qualifying income.
Lenders differ on whether the letter is optional or required. A lender that accepts one may set a floor, so the ratio cannot go below a stated minimum even if the preparer states less. The programs and the floors vary, so check the matrix.
What the letter has to do
The letter has to state the ratio, say how the preparer knows it, and identify the business and the period. What a CPA letter for a bank statement loan must confirm covers the wording and the details a lender looks for.
A comparison on the same deposits
Take a consulting business with $20,000 of qualifying deposits a month. With a 30 percent default factor, income is $14,000. A letter stating a 20 percent ratio would, if accepted, give $16,000. A letter stating a 50 percent ratio would give $10,000, lower than the default. In that case the borrower is better off without the letter, if the program allows that choice.
The example shows why a broker should ask the preparer for the ratio before the letter is written into the file. A letter is a document, and once submitted it is part of the record.
Which comes first
Decide the factor before you quote. If the borrower's costs are low, ask whether the lender accepts a letter. If the costs are high, the default may be kinder. The next section describes the risk on the other side.
When does a low expense factor overstate bank statement income?
A low expense factor overstates income when the business's real costs are higher than the factor assumes. The borrower qualifies for a payment the business cannot support. A low factor also invites a second look from an underwriter who compares it against the statements.
Statements often hold evidence of costs. Rent, payroll, loan payments and supplier payments show up as debits. If the debits are large compared to the deposits, a 20 percent factor looks too good.
Signs the factor is too low
- Debits for payroll and suppliers take most of each month's deposits.
- The balance stays flat or falls even in months with high deposits.
- The business carries loan payments that do not appear in the factor.
- NSF fees or overdrafts follow large debit weeks.
TrueBankFlow sorts transactions into income, payroll, rent, loan payments and other categories the reviewer can edit, and it flags NSF fees and overdrafts, which puts the cost side next to the factor in use; it does not set the factor.
What to do about it
Compare the debits to the deposits before you submit. If costs run far above the factor, tell the borrower that the lender may question it, and consider whether the loan amount is safe at a higher factor. A borrower who qualifies only at the lowest factor has little room if the lender or the underwriter pushes back.
The effect on the lookback
The factor interacts with the period used. A shorter lookback in a growing business can pair with a low factor to raise the income further. How a 12 month lookback compares with 24 months shows how the two choices combine, and the business bank statement loan guide shows how business accounts are treated in the program as a whole. To run the calculation on a real file, get started with TrueBankFlow.