Sharpening the Focus: Using Cash-Flow Data to Underwrite Financially Constrained Businesses

Empirical White Paper

Report Summary

This empirical paper analyzes the impacts on predictive accuracy and credit access of incorporating electronic cash-flow data into small business underwriting models using data from two fintech lenders that lend to a broad spectrum of customers. The research was conducted in collaboration with Sabrina T. Howell and Siena Matsumoto at the New York University Stern School of Business.

The paper finds that adding cash-flow information substantially increases the predictive signal of models that rely primarily on the business owners’ personal credit scores and firm characteristics. The effects are larger for low-score owners whose businesses are young (less than five years old). An appendix analyzes impacts based on the location of the small business.

The results suggest that adopting cash-flow data could be particularly important in increasing lenders’ confidence when underwriting financially constrained business owners that have historically been considered high risk.

Acknowledgments

This empirical white paper is part of a broader research project to evaluate ways to improve credit access for small businesses through the use of non-traditional data sources and mission-based lenders. Concurrent with this report, FinRegLab updated its qualitative study of mission-based lenders’ adoption of cash-flow data and platform technology to increase lending to small businesses. Subsequent work with Emmanuel Yimfor of Columbia University will analyze loans issued by mission-based lenders that are using cash-flow data in their underwriting processes. Other reports in this series are available here.

The authors of this report are Sabrina T. Howell, Siena Matsumoto, and Kelly Thompson Cochran.

We would like to acknowledge Paula Ochiel, Karla Renschler, and Zishun Zhao for their contributions to this report and the broader project.

With Support From

This research initiative was funded by a grant from the U.S. Department of Commerce, Minority Business Development Agency, and support from Visa. In addition, Plaid provided account connectivity services to the pilot programs by mission-based lenders to allow loan applicants to authorize their account data to be accessed for underwriting.