In the early days of building a business, one thing stresses out all entrepreneurs, regardless of what industry they are operating in – access to credit. New businesses operate on unsteady revenue streams, and their profit margins, especially as they scale up, can be razor-thin. So having access to credit for managing cash flow can be a crucial asset. Research from PYMNTS Intelligence has found that 6 in 10 smaller firms have not been able to get access to the credit they need.
Unfortunately, as a new business, it takes time to establish your business’s credit history to qualify for credit lending from a financial institution. It can take months or even years to build up a solid history to show financial institutions that it’s safe for them to lend your business money. For many new businesses, making payments and maintaining their businesses without access to reliable credit can be a huge struggle.
But change is coming. As payment technology speeds up and real-time account activity tracking becomes more popular, a new concept of credit lending is emerging. Open banking institutions have a new solution ‘cash flow-based underwriting’. This type of credit lending would focus less on your business’s credit score and more on your real-time account and cash flow management. The idea is that if you can successfully manage your finances, even without an established credit history, you’ll be responsible for any lending you’re allotted.
Credit scores are not a perfect science, and their limitations have long been a pain point for small businesses. Even the Consumer Financial Protection Bureau (CFPB) admits there are advantages to using cash flow-based data: “Our analysis suggests that people who self-report positive cashflow perform considerably better than people who self-report less positive cashflow, even when holding credit scores constant. Consumers with positive self-reported cashflow outperform by 20 percent or more depending on the cashflow proxy used.”
As an independent treasury strategist, that works with many businesses of all shapes and sizes, changes like this are a welcome sight. New companies that work hard to maintain positive cash flow and manage their growth responsibly should be rewarded for their diligence and not penalized for how long they have been in business. Cash flow-based underwriting can make access to credit much easier for new businesses. I can help your business establish sound financial management principles and payment processing strategies so you can qualify for whatever type of lending you may need. Reach out today for a consultation! https://www.richmondfs.com/
