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: This paper studies financial constraints over the entrepreneur’s lifecycle in the context of small business lending. Underwriting relies on personal credit scores, which are backward-looking and favor long histories. In causal analysis, we show that younger entrepreneurs’ loan applications have higher approval rates when the lender incorporates recent cash flows from business checking accounts. The result does not reflect lender risk-taking and is concentrated among lower-FICO applicants and the youngest entrepreneurs. Personal credit scores are both noisier and mechanically biased downward for younger entrepreneurs. Cash flow data provide an independent signal that reclassifies these entrepreneurs as less likely to default.

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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