Expense Factor Explained

How lenders use expense factors to calculate qualifying income from business bank statements

The expense factor is the percentage deducted from your business bank statement deposits to account for operating costs. It’s one of the most important variables in determining your qualifying income.

How It Works

When you submit business bank statements, lenders recognize that not all deposits are profit—some money goes toward rent, payroll, supplies, and other expenses. The expense factor estimates what percentage of revenue covers these costs.

Qualifying Income = Total Eligible Deposits × (1 − Expense Factor)

With $300,000 in annual deposits and a 40% expense factor:

$300,000 × 60% = $180,000 qualifying income

That same $300,000 with a 25% expense factor:

$300,000 × 75% = $225,000 qualifying income

A 15% difference in expense factor means $45,000 more in qualifying income—potentially hundreds of thousands more in borrowing power.

Typical Expense Factors by Industry

Lenders assign expense factors based on typical profit margins for your business type:

Industry	Typical Expense Factor
Consulting / professional services	10-25%
Real estate agents / brokers	20-35%
Medical / dental practices	25-40%
Contractors / tradespeople	35-50%
Retail / e-commerce	40-55%
Restaurants / food service	50-60%

Lower-overhead businesses like consulting get lower expense factors. Asset-heavy or inventory-based businesses get higher ones.

How Lenders Determine Your Expense Factor

Lenders use one or more of these methods:

Default by business type — The lender assigns a standard factor based on your industry classification.

CPA letter — A letter from your accountant stating your actual expense ratio can override the default. If your CPA confirms expenses are only 30% of revenue, you may get a 30% factor instead of a 50% default.

Profit and loss statement — A P&L prepared by a CPA showing actual income and expenses can justify a lower factor.

Bank statement analysis — Some lenders review your statements for obvious expenses (rent, payroll) and calculate a custom factor.

Reducing Your Expense Factor

To maximize qualifying income, aim for the lowest defensible expense factor:

• Get a CPA letter documenting your actual expense ratio
• Provide a profit and loss statement for the statement period
• Choose a lender whose default factors favor your business type
• Ensure your business is classified correctly—“consulting” vs “contractor” can mean a 20% difference

Personal Statements and Expense Factors

Personal bank statements typically have no expense factor or a minimal one (5-10%). Lenders assume deposits to personal accounts are already net income—money you’ve paid yourself after business expenses.

This is why some borrowers qualify for more using personal statements, while others do better with business statements and a favorable expense factor. Run the calculations both ways.