Why Forward-Looking Accounting and Financial Data vs. the Traditional FICO Score
Whether it’s a startup or a well-established company, every entrepreneur may require some extra working capital sooner or later to successfully run and grow their businesses.
Lenders consider a plethora of things when reviewing a loan application of a small and medium-sized business, from credit history, annual revenue, profit & loss, and more. While some established businesses can easily show their creditworthiness, most small entrepreneurs, however, have a limited or no credit history and revenue.
Aspiring entrepreneurs who have just started their new venture, businesses who are struggling with cash flow issues, and those who have poor credit scores due to bankruptcy filing, late payment on bills, or any other reason.
Earlier it was a big challenge for lenders, but now, with the help of forward-looking accounting and financial data, the problem is being solved.
The Power of Forward-Looking Accounting and Financial Data
Forward-looking accounting and financial data is a business’ predicated cash flow that gives lenders an insight into a business’ future market behavior, trends, and financial health. By examining forward-looking accounting and financial data, lenders can better examine the creditworthiness of a business and make smarter lending decisions.
Forward-looking cash flow data usually isn’t collected by credit reporting agencies but typically provided to lenders when an SME is seeking a business loan. In this essence, forward-looking data is a variety of sources including accounting data, financial data, banking data, usage of business credit cards, and other financing data. This data also contains real-time short-term and long-term cash flow forecasting data that is supported by numerous other data attributes such as raw financial data, KPI trends, ratio and risk parameters, and more.
Banks, alternative lenders, and other financial institutions can look and analyze this data to check a business’s ability to repay the loan amount. It helps lenders to know the SMEs potential success and the loan’s anticipated payoff. Cash flow is the definitive indication of how a company is doing.
Predicative cash flow data reveals a business’s future cash position and challenges. It gives lenders a more reliable statement to make a lending decision. It is not just guesswork; it is a scientific and well-thought process that explains a company’s resources.
Futuristic Data to Revolutionize Traditional Banking
As a lender, leveraging forward-looking cash flow data can be a great way to get new borrowers into mainstream business lending solutions and to partner with FinTechs who are already creating innovative lending products and providing this data to help with their customer growth.
Many FinTechs have created or are creating simple, single APIs to deliver the most robust accounting and financial data for business lending. By accessing this data, lenders now can gauge risk potential, creditworthiness and determine what loan products are the best fits for that specific business. This can prove really helpful as it gives lenders a wonderful opportunity to connect with numerous new potential business customers instead of offering existing customers financial products they don’t require.
Bottom Line
While forward-looking cash flow data will help simplify business lending, it won’t totally replace the traditional FICO credit score. It is a step towards building a lending ecosystem that embraces a higher percentage of businesses. Soon, predictive cash flow data will become the primary tool that banks and alternative lenders can leverage to determine creditworthiness and the right funding solution for businesses.