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Expense factors, explained
The single number that most affects how much income a lender counts from your deposits.
An expense factor is the share of your business deposits a lender sets aside as the cost of running the business. A flat factor near half of deposits is a common starting point. Select programs may allow a lower factor when a credentialed tax professional documents the business.
Why a factor exists at all
A tax return subtracts your actual costs. A bank statement review has no such line, because deposits show money coming in and not what it cost to earn. The factor is the lender's way of estimating what portion of deposits you actually keep.
The math in one line
Eligible deposits multiplied by one minus the factor, divided by the number of months. A higher factor lowers the monthly figure. A lower factor raises it.
Flat factors and documented factors
A flat factor
Many programs apply one number to everyone who uses business statements. It is simple, and it is often near half of deposits.
A documented factor
Some programs let a credentialed third party, such as a CPA, an enrolled agent or a licensed tax preparer, describe the business and support a different factor. The factor may depend on the type of business, how many employees or contractors you pay and how much of your cost is payroll.
Who tends to benefit from documentation
- Service businesses with few hard costs, such as consultants and coaches.
- Owners who work alone and have no payroll.
- Professional practices where overhead is steady and easy to show.
A business with heavy materials, inventory or subcontractor costs may land closer to the flat figure.
What you should not assume
- That the factor will be lower than your real costs. Lenders may set it above what you spend.
- That every program offers a documented option.
- That a number you saw for one lender applies to another.
The factor is one of the biggest levers in the whole file, so it is worth asking about before you choose a program.
Related
See what a documented factor could do for you
Talk with a loan officer about whether a tax professional letter fits your file.
Frequently asked questions
Is the expense factor the same as my tax deductions?
No. Deductions are what you claimed on a return. The factor is a lender's estimate of costs against deposits, so the two can differ a lot.
Will my CPA need to write a letter?
Only if the program you choose offers a documented factor or asks for third-party verification of your business. Many files include a letter for other reasons, such as confirming how long you have been in business.
Can the factor change during the loan process?
It is set by the program, but the program can change if the file does. If the account type, the business type or the documents change, the factor may move with them.