Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow

Christopher M. Hair, Sabrina T. Howell, Mark J. Johnson and Siena Matsumoto

No 33367, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Younger entrepreneurs are disadvantaged by traditional loan underwriting, which relies heavily on personal credit scores. With data from three fintech companies, we show that incorporating timely information about ability to repay from business checking account statements particularly improves default prediction performance for younger business owners. We develop a novel method to compare model predictions across subgroups—Tail Analysis for Comparative Outcomes (TACO)—which finds that switching from a Baseline (FICO-driven) model to a Cash Flow-enhanced model benefits younger entrepreneurs. We confirm this in causal analysis of approval decisions, showing that access to cash flow-intensive underwriting increases approval rates for younger vs. older entrepreneurs.

JEL-codes: G21 G23 G32 J14 J16 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-lab, nep-pay and nep-sbm
Note: AG CF PR
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