Home
  /  
Learning Center
  /  
What is cash flow underwriting? Key insights for SMB financing

What is cash flow underwriting? Key insights for SMB financing

Bailey Schramm

Survey data from Goldman Sachs last year shows that 77% of small businesses are concerned about their ability to access capital. 

The traditional business lending model leaves many small operators out to dry, especially if they have limited credit history or available collateral. 

However, an emerging underwriting model based on cash flow data may help to close this gap. 

In this article, we will discuss how this underwriting method works, how it differs from traditional underwriting, and what it means for small and medium-sized businesses (SMBs) trying to get financing. 

Key takeaways

Cash flow matters more than credit: Cash flow underwriting focuses on how much money a business earns and spends rather than its credit history.

Better chances for small businesses: Cash flow underwriting can help small businesses get loans even if they have limited credit history or collateral.

Boost Financial Smarts: Understand where every dollar goes to improve budgeting and make smarter financial decisions.

What is cash flow underwriting?

Cash flow underwriting is a method lenders can use to assess a borrower’s creditworthiness. 

As the name might suggest, lenders will use the loan applicant’s cash flow data to assess the credit risk of lending them money. 

The cash flow data in question typically refers to the money flowing in and out of the business, which is summarized in the company’s bank statements and transaction history. 

Lenders will review and evaluate the borrower’s cash flow data to understand their financial positioning and their ability to repay the loan amount they are requesting. 

Cash flow underwriting is a deviation from the traditional underwriting model, which we will discuss in more detail in just a moment. 

Notably, cash flow underwriting can be used for both personal and business loans. However, in the context of this blog, we will refer solely to its use for business lending purposes.

Common lending criteria for cash flow underwriting

Lenders using this underwriting method can consider a number of cash flow metrics and criteria when evaluating loan applicants.

This might include: 

  • Historical revenue trends
  • Operating cash flow
  • Gross profit 
  • Current cash flow data from recent bank statements

Keep in mind that the specific benchmarks and criteria necessary to qualify for funding will vary between lenders. 

Cash flow underwriting vs. traditional underwriting 

Cash flow underwriting for small business loans provides some unique advantages for SMBs trying to secure funding

To understand the advantages of this underwriting method, it’s important to see how it compares to the traditional approach. 

The traditional underwriting approach

The traditional underwriting process for business loans has a large emphasis on credit history. 

While this might seem simple enough for large, established businesses, this can pose significant challenges for smaller organizations that are just starting out. 

According to data from a National Small Business Association study, 20% of small business loans are denied due to business credit. 

In some cases, startup or small business owners with limited credit history may be able to get around these requirements by making a personal guarantee. 

This can help a company secure the funding they need, though it places additional risk on the business owner if the company fails and defaults on the loan. 

The cash flow underwriting approach

In contrast, cash flow underwriting is more focused on the company’s historical cash flow data and their ability to generate sufficient cash flows in the future to repay the loan. 

Thus, even if a company has thin or nonexistent credit, they may be able to qualify for a loan based on their revenue and expense data. 

Rather than outright denying companies that don’t meet the lender’s credit criteria, they can still get a sense for the company’s ability to repay the loan based on their cash flows. 

For instance, a company that nets $25,000 per month may not have previously borrowed money or used a business credit card

This company may be denied a loan from traditional lenders that are solely interested in the credit history. 

However, a cash flow-based lender might determine that their past earnings and transaction history shows they have the ability to repay the loan. 

The impact of cash flow underwriting on SMBs

As illustrated above, cash flow underwriting can positively impact loan approval rates and borrowing terms for small businesses. 

Here are some of the ways that cash flow underwriting is advantageous for SMBs: 

Better funding accessibility

By considering alternative data, cash flow-based lenders can make funding more accessible to a small businesses and startups. 

Though credit history is one of the most common risk indicators traditional lenders use when evaluating loan applications, businesses with no or little credit may still be capable of repaying a loan. 

Instead, cash flow underwriting takes into account the business’s operational performance, helping to make up for the significant portion of business owners that would otherwise be excluded from financing.   

More favorable loan terms

Even if a business could qualify for a loan under the traditional method, they may be able to secure better terms, such as a lower interest rate, with cash flow data supporting their application. 

Another advantage is that cash flow underwriting can support further flexibility tailored to the company’s unique cash flow patterns. 

For instance, a seasonal business–like a company that does ski rentals–may secure a variable repayment schedule that aligns with their seasonality. 

Support for business development

Companies that are able to access funding through cash flow underwriting can use the capital to spur further growth and innovation, increasing their ability to repay the loan. 

This can also create positive ripple effects throughout the economy as these companies receive the capital to grow and hire more employees.

Not to mention, the company will start to build a positive credit history by making on-time payments to the lender. 

Potential challenges of cash flow underwriting 

Cash flow underwriting is still in the early stages of hitting the market. So, there are some potential roadblocks and challenges of the method that are worth noting: 

Length of cash flow history 

Though cash flow underwriting can help businesses with little or no credit secure funding, it still requires companies to have a substantial amount of cash flow data for lenders to evaluate. 

In exchange for credit data to prove a borrower’s reliability, the lender will still want to see that the company’s cash flows are stable enough to make repayments. 

So, companies that have only been in operation for a few months may still have troubles qualifying for a business loan under this model. 

Consumer awareness

Cash flow underwriting is still a relatively new option for business financing. 

Some business owners may not be aware it exists or what lenders’ requirements are, while others are skeptical of the method altogether. 

It may take some more time for consumers to become more familiar with the method and willing to pursue alternative financing options outside of the traditional bank setting. 

Technological roadblocks

Traditional lending models that rely on credit history benefit from existing infrastructure and regulations that make it easy for lenders to access data from the major credit bureaus. 

On the other hand, sharing cash flow data is a bit more nuanced. It requires consumers to grant access and permissions of their data and accounts to the lender, which can add more friction to the process. 

Variations in different service providers and account policies create a lack of standardization that can lead to lower efficiency. 

As cash flow underwriting and open banking policies continue to develop, this will likely become more streamlined. 

Enjoy flexible underwriting to access the funding you need

Small business owners and finance managers that want to secure funding for their company should be aware of the advantages of cash flow underwriting. 

Especially if they’re one of the millions of small business owners that are unable to access funding through the traditional route, cash flow lending can help them secure the capital they need to support operations and grow their business. 

With BILL, it’s easy for businesses to secure the credit they need to operate and grow. We use flexible underwriting models to help companies access funding based on their unique circumstances. 

See how you can access fast and flexible business credit with BILL by signing up today or request a demo.

Bailey Schramm

Bailey Schramm is a freelance writer who creates content for BILL. She graduated summa cum laude from the University of Wyoming with a B.S. in Finance. Bailey combines her expertise in finance and her 4 years of writing experience to provide clear, concise content around complex business topics.

BILL and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. BILL assumes no responsibility for any inaccuracies or inconsistencies in the content. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, BILL is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event shall BILL, its affiliates or parent company, or the directors, officers, agents or employees thereof, be liable to you or anyone else for any decision made or action taken in reliance on the information in this site or for any consequential, special or similar damages, even if advised of the possibility of such damages. Certain links in this site connect to other websites maintained by third parties over whom BILL has no control. BILL makes no representations as to the accuracy or any other aspect of information contained in other websites.