Reasons Why Cash Flow Analysis of their Customers is Important for SME Lenders
How would you know if an SME has a successful business? Though there are different ways to measure small business success, it’s important to have a universally accepted measure. And that’s cash.
Cash is the lifeblood and key to every SME success. How much cash your borrowers have on hand, how much cash they’re generating over a given period of time, and how much cash they’re expecting to generate in the near future are all great ways to quantify the success of your SME customers.
Today many financial technology companies are doing cash flow analysis of a business with the help of AI and ML-based applications and providing the most robust and real-time predictive data to SME lenders. And ultimately, this real-time cash flow analysis of a business helps you improve customer experience, reduce credit risk, determine creditworthiness and make data-informed lending decisions.
Why Cash Flow Analysis?
To simply put, cash flow analysis measures how much cash is coming in and going out of a business during a given period of time. Since poor cash flow is one of the most common reasons why financial institutions are reluctant to provide loans to SMEs, it is the best measure of a company’s performance and its ability to repay the loan amount.
Cash flow analysis of your customers is critical because it can be measured and compared in standard units acceptable to anyone. If you’re having a tough time comparing two SMEs for the loan — no matter how different — predictive cash flow data is the tool for preparing a true “apple to apple” comparison. Moreover, an SME might fake its profit and revenue, but can’t its cash flow.
Besides, cash flow analysis allows lenders to lend money based on the projected future cash flow of an SME. It helps in reducing the credit risk of SME lenders since they have access to the most accurate, efficient, and real-time of their borrowers.
The Importance of Cash Flow Analysis in SME Lending
Cash flow analysis tells lenders about the cash an SME may generate in the future. This data is equally important as the accounting, banking, and other financial data. With cash flow analysis, you can access the most accurate cash flow data and accurately predict the financial future of your borrowers.
Historical data (credit history or score) in lending will only tell you only how reliably a business owner has made payments to a loan product. But a cash flow analysis of a specific period gives you an idea of how much debt an SME can successfully handle and how much cash is left to be reinvested into the business.
From the past few years, cash flow predictive data and emerging financial technologies are transforming SME lending. AI and ML-based systems are being used by many financial technology companies for cash flow analysis. Moreover, many FinTechs are offering financial APIs that allow lenders to access, review and analyze the most real-time cash flow data of their borrowers.
In today’s digital lending ecosystem, predictive cash flow data is the most valuable and powerful fuel that can help SME lenders to reduce credit bias, make loans fairer, provide customized solutions and make intelligent lending decisions. And cash flow analysis is the tool that can help you get that data.