Verifying a business is a top priority for funders, especially when every deal carries financial and compliance risks. Without proper checks, you could end up working with a company that isn’t real, isn’t licensed, or has hidden ownership that exposes you to fraud or regulatory trouble.
KYB requirements outline the steps you need to take to confirm a business’s identity, ownership, and legitimacy before moving forward with funding.
Let’s look at what KYB requirements mean for funders and why following them helps you stay compliant, reduce risk, and build stronger business relationships.
Introduction to Know Your Business
Know Your Business (KYB) is a key part of business loan processing. It helps you confirm that the companies you work with are real, lawful, and trustworthy. The process involves verifying details like business licenses, ownership, and financial history.
Financial institutions, payment providers, and other regulated firms use KYB to prevent financial crimes.
For funders, it adds a layer of trust when assessing potential business partners. It also ensures that the business information you rely on is accurate and up to date.
The History of KYB
The concept of KYB began in 1970 with the Banking Secrecy Act (BSA). This law required U.S. financial institutions to record and report large cash transactions and suspicious activities. The goal was to combat money laundering tied to drug trafficking during the War on Drugs.
Later, the 2001 USA Patriot Act built on the Banking Secrecy Act and introduced Know Your Customer (KYC) rules. These rules aimed to stop terrorist financing by requiring banks to verify the identity of their customers.
However, KYC had a gap. It did not require banks to identify the real owners of the companies they worked with. That gap made it possible for criminals to hide behind fake businesses.
Know Your Business was created to fill this gap. It helps verify who really owns a company so funders and financial institutions can check a business before working with it.
Today, KYB works alongside KYC to make business dealings more transparent, spot illegal activity, and prevent financial terrorism in regulated industries.
What Are KYB Regulatory Requirements?
KYB regulatory requirements help you confirm that a business is real, legal, and compliant before offering funding. These rules are part of broader business regulations that aim to stop fraud, tax evasion, and other financial crimes.
In the United States, the Financial Crimes Enforcement Network (FinCEN) enforces these through the Customer Due Diligence (CDD) Final Rule, which builds on the Bank Secrecy Act.
You must verify the company’s legal name, business registration status, address, and tax details like the Employer Identification Number.
Funders and financial institutions often perform KYB checks when opening new accounts or forming partnerships. This involves scrutinizing foreign transactions and monitoring for suspicious cash transactions that may hint at corruption or money laundering.
Following relevant regulations builds transparency, helps combat money laundering, and protects your business from risky or illegal partnerships.
What Are Ultimate Beneficial Owners?
A company’s ultimate beneficial owners (UBOs) are the people who truly own or control it, even if the business has multiple layers of ownership.
The Corporate Transparency Act (CTA) requires business entities to share information about beneficial ownership with FinCEN. Under the CTA, anyone who owns or controls at least 25% of a company, or has significant influence, must be identified as a UBO.
For funders, identifying UBOs is a key step in the business verification process. It supports risk management by finding links to politically exposed persons (PEP) or names mentioned in adverse media.
What Are the KYB Requirements for Funders?
KYB requirements help you confirm that a company is legitimate, financially stable, and compliant with the law. Let's look at what is required to do a full KYB check:
Business Registration Verification
Before approving a deal, you need to confirm that a business is officially registered and operating legally.
You can check a company’s details in the Secretary of State database or its local equivalent. There, you’ll find the company’s name, registration number, and status, showing if it’s active, dissolved, or in good standing.
Next, confirm that the business has valid licenses and permits for its industry. For instance, a construction firm may need contractor licenses, while a restaurant may require health permits. Reviewing these records helps confirm the company is compliant and allowed to operate.
Inconsistent or outdated registration details are a warning sign. If you notice mismatched names, expired permits, or inactive status, the company may be illegitimate or hiding its real activities.
Identity Verification Of Beneficial Owners And Controllers
Verifying who truly controls the business is just as important as confirming the business itself. As part of KYB checks, you must identify and verify ultimate beneficial owners who own or control the company.
This step prevents criminals from hiding behind complex ownership structures and helps you understand who actually benefits from the business’s activities.
You can perform this verification by collecting government-issued identification, Social Security numbers, and ownership documents.
Identifying and verifying controllers protects you from regulatory violations and reputational damage.
Financial Documentation
Reviewing financial documents gives you a clear understanding of how a business earns, spends, and manages its money.
These records help you evaluate whether the company can meet repayment obligations and maintain stability after receiving funding.
Common documents include business bank statements, tax returns, and profit-and-loss reports. Bank statements show cash flow and spending patterns, while tax filings confirm revenue and operational legitimacy.
Credit Evaluation
Credit evaluation helps you understand how a company manages its financial responsibilities.
You need to review both business and personal credit reports from agencies and credit bureaus to see how the business manages debt, payments, and overall financial health.
A business credit report often includes trade lines, outstanding balances, payment histories, and any legal filings such as liens, judgments, or bankruptcies.
This data shows how well the company meets its financial obligations and maintains good credit relationships with suppliers and service providers.
Evaluating credit performance also helps identify warning signs like frequent late payments, high credit utilization, or recent negative marks. These patterns can point to cash flow issues or growing financial strain.
Time In Business
The length of time a business has operated says a lot about its stability and reliability. Funders often require 6 months to 2 years of operating history before approving a deal.
This period shows whether the company earns steady revenue, keeps loyal customers, and manages expenses responsibly.
A business that’s been around for years proves it can handle common challenges like market changes, cash flow gaps, or seasonal slowdowns.
For example, a restaurant open for two years has likely learned how to manage supply costs, maintain service quality, and build repeat customers.
Younger businesses, on the other hand, often lack a solid financial history. They may still be testing their model or dealing with high early costs, which makes it harder for funders to assess repayment potential.
Business Structure
Understanding a company’s legal structure helps you assess risk, ownership, and accountability more accurately. Each structure comes with its own legal obligations, tax responsibilities, and documentation requirements.
For example, corporations and LLCs must often submit incorporation documents and annual filings to the Secretary of State, while sole proprietors may only have a business license or trade name registration.
Knowing the structure helps you identify who is legally responsible for repayment and who holds decision-making power. It also clarifies how assets are owned and how the business’s financial obligations are handled.
What Are the Benefits of KYB Compliance?
Let's go into detail about how proper KYB compliance can help give you confidence that you are working with trustworthy companies while keeping your funding activities secure and compliant.
Stronger Security And Fraud Prevention
KYB compliance helps protect your business from fraud and illegal activity. By using fraud detection software, document verification, and reviewing records in the state company registry, you can confirm that a company exists and is operating legally.
This prevents shell companies from entering your network or using your platform for suspicious financial transactions.
Better Regulatory Compliance
Following regulatory compliance standards helps you avoid penalties and reputational damage. KYB aligns with anti-money laundering laws and other diligence requirements that funders must follow.
By keeping accurate records, you can show proof of compliance during audits and build stronger credibility with regulators and partners.
Smarter Risk Assessment
KYB compliance helps you see potential risks before funding a business. With due diligence and regular monitoring, you can catch red flags like ownership changes or connections to high-risk industries.
A strong risk assessment process also helps detect businesses tied to past violations or suspicious activities, reducing long-term exposure.
Faster And Easier Operations
Automated KYB processes improve efficiency by cutting down on manual reviews. Automation pulls data from verified sources and cross-checks details instantly, allowing ongoing monitoring so funders can spot changes in ownership, status, or activity right away.
This speeds up onboarding for legitimate businesses while allowing you to focus on decision-making and maintaining trusted business relationships.
Common Challenges in the KYB Verification Process
Real-world verification often involves challenges that slow things down and increase risk. Here are some of the challenges underwriters might face during the business verification process.
Naming Variations Can Cause Missed Matches
Businesses often register under one name but use variations elsewhere. For example, “ABC, Inc.” might also appear as “ABC Incorporated” or “ABC Inc.”
Manual searches can miss these small differences, causing incomplete results. This makes it harder to confirm whether a business is active and in good standing before funding.
Multi-State Registrations Add Complexity
Many companies operate in several states, and each state keeps separate records. These differences create confusion when reviewing a business’s standing or history.
For example, one state’s system might list a company as active while another shows it as inactive. For funders, this inconsistency complicates KYB procedures and increases the time spent confirming details.
Inconsistent State Websites
Each state’s business registry has its own search tools, data formats, and response times. Some updates daily, while others take weeks.
These inconsistencies force funders to check multiple sources manually, which increases delays and reduces accuracy when verifying regulated business entities.
Data Interpretation Requires Expertise
Terms like “Active,” “Good Standing,” or “Compliant” don’t mean the same thing across all states. Understanding these differences requires both time and experience.
Without expertise, funders might misjudge a company’s current legal status or overlook hidden compliance issues that could affect future financial activities.
Get Clean, Verified Business Data in Seconds With Heron
Heron is designed for funders who want to move faster without sacrificing accuracy or compliance. If your team spends hours processing documents and verifying business data, Heron is here to change that.
Its KYB automation tools help you verify companies instantly, mitigate risks, and make confident decisions backed by clean, real-time data.
You no longer waste time on repetitive work. Heron helps you stay compliant, protect your portfolio, and focus on funding more deals.
Secretary Of State Verification
Manual Secretary of State checks slow your team down. Heron delivers verified business data from all 50 states and D.C. within seconds.
It identifies naming differences with 98% accuracy, saving funders over 250 hours and $10,000 in monthly labor costs.
Each result includes timestamped screenshots and registration details so you can ensure compliance while reviewing accurate, real-time records.
Court Records Search
Missed lawsuits can cost thousands. Heron connects directly to federal and state court databases, finding judgments and filings in five seconds.
This feature cuts 20 minutes of manual research per deal, saving over 300 analyst hours each month.
It also reduces missed cases by 30%, protecting your business from $85,000 in losses caused by incomplete background checks.
Web Presence Verification
A strong online footprint confirms business legitimacy. Heron verifies both the business and its owners across the web to give you the full picture.
It reviews a business’s online activity on Facebook, Instagram, and LinkedIn while also checking the owner’s presence through personal profiles and professional networks for any signs of adverse media.
Then it scans popular rating sites such as Yelp, BBB, and Google for bad reviews or negative trends that bank statements miss.
All in under 10 seconds, saving you and your team up to 833 hours every month.
Credit Bureau Integration
Heron integrates with trusted credit bureaus to pull financial data within seconds. You see payment patterns, debt management, and financial activity at a glance.
The system also flags irregular transactions, helping you meet your legal obligation to ensure compliance and protect your funding decisions from unnecessary risk.
NAICS Database
Heron’s NAICS Database automatically classifies companies by industry with 97.56% accuracy. This feature helps you identify restricted or high-risk sectors early.
You can apply custom filters that flag or block specific industries, keeping your portfolio clean and compliant while saving valuable review time.
Address Validation
Incorrect addresses lead to errors and wasted time. Heron’s Address Validation feature checks every address against postal databases, fixes mistakes, and confirms the location is real.
It also provides mapping data that highlights high-risk areas, helping you identify environmental or geographic risk factors that might affect funding decisions.
DataMerch Lending History Integration
Heron’s connection to DataMerch gives you access to over 100,000 merchant records from across the funding space. You can instantly view payment histories, defaults, and warning patterns that standard credit reports often miss.
This integration helps you detect risky applicants early, lower default rates, and strengthen your portfolio quality.
FAQs About KYB Requirements
What is required for KYB?
KYB requires verifying a company’s identity by checking registration details, ownership structure, and legal documents. The goal is to confirm that a business is legitimate before completing business onboarding with banks or other financial institutions.
What does KYB stand for?
KYB stands for “Know Your Business.” It’s a verification process used to confirm a company’s authenticity, ownership, and operations to prevent fraud, money laundering, or illegal activities.
What is KYB compliance?
KYB compliance means a business follows legal rules for verifying the companies it works with. It helps assess the customer’s risk profile and maintain transparency in financial transactions.
What are KYB documents?
KYB documents are records that show a company’s legal structure, ownership, and beneficial owners. They help funders assess risk and confirm that the business meets regulatory requirements.
