Mystery withdrawals could be your lender, not a thief

Your Business Credit columnist Elaine Pofeldt
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

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Question Dear Your Business Credit,
My daughter borrowed from a funding company for payroll. She had never been in trouble before with expenses, but seemed to have no money each month. Money was disappearing from her account. My daughter's CPA is trying to find why.

She told this to the funding company. She now can't pay the lender the full amount. She had an agreement for less approved but they say it somehow went to the risk department at a legal firm. They won't call back and I leave a massive number of messages. When I am lucky to get them on the phone they are "working on preparing to make payment arrangements."

We were never told any of this was about to happen. They froze our credit card payments from clients. We needed this for payroll. We are about to have 30-plus angry employees. Why didn't they just call and say, "Let's make an arrangement?" I'm sure they will go after our bank account next but why??? This will put my daughter in huge trouble with the IRS and State Comptroller. They want her out of business? She does not AT ALL want to close and go bankrupt after 20 years in business. -- Patricia

Answer Dear Patricia,
Wow! I can understand why you and your daughter are worried. I do think there's a solution, but you will need help from a pro.

Your daughter's first major problem is not knowing why money is disappearing from what appears to be her business bank account. Ordinarily, it should not be hard to figure out why money is being deducted from a bank account, because the bank explains where an electronic debit is going on the bank statement. I am puzzled as to why your daughter cannot determine who is deducting the money.

If there are unauthorized transactions going on, she needs to report this to the bank immediately, because it is possible someone has stolen her debit card information. She will ultimately have to swallow the losses if she does not report them. Another possibility is embezzlement. If you suspect that is the case and your daughter's accountant can't figure out how it is happening, you may need a forensic accountant to determine this. Embezzlers can be pretty clever in how they steal from businesses.

Reading between the lines, I suspect that what happened is your daughter may have gotten money advanced by an alternative finance company, or receivables financer. These companies advance money against a borrower's incoming credit card or PayPal receivables. The financing companies then automatically deduct a certain percentage of the merchant's daily, weekly or monthly receivables to get repaid. It's a similar concept to the centuries-old practice of factoring, only the newer loans are not tied to particular invoices.

Sometimes, the fees these alternative lenders charge are very high if you convert them to an annual percentage rate. In some cases, it is hard for a merchant to understand how much they actually must repay, because the financing companies explain it in a very confusing way.

Once such financing companies advance the money, they begin deducting repayments from the business's bank account or PayPal account. They do this regardless of how healthy -- or unhealthy -- the merchant's cash flow is at the moment. That takes away the merchant's option of holding onto the cash for a few more days in order to make payroll or pay another bill. If the finance company is charging the merchant very high fees, this practice can starve a business of cash and, in a worst case scenario, cause a business to fail. For more about how this happens, please read "New business financing sources to try when the bank says no."

Since your daughter now can't make payroll and does not seem to have other money available to repay the financing, she is in a crisis. I would strongly advise she get legal help from an attorney in your state who specializes in debt and bankruptcy. It sounds like the outside financing company could be willing to make payment arrangements with you, so perhaps it needs more of a push in that direction by someone experienced in negotiating in this situation.

You have one factor in your favor: The financing company will not benefit if your daughter's business goes under, because that will greatly reduce the chances it will be paid back. A good attorney will help you get your daughter back in control of this situation.

Once she gets that help, I'd strongly suggest she speak with her accountant about how to improve cash flow at the business. A business should not have to rely on outside funding to make payroll, so she may need to find ways to increase revenue or get customers to pay her more quickly. Good luck. I am rooting for her!

See related: Remorseful fraudster must find way to repay business partner, Creative financing for small businesses, 7 tips for using online alternative business lenders

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Updated: 02-22-2019