Importance of Cash Flow Predictive Data During Crisis
COVID-19 outbreak has severely affected businesses across the world, especially small businesses that were temporarily closed during the pandemic. Even most small business entrepreneurs are still struggling for profitability.
Today, many entrepreneurs are looking for working capital to keep their businesses afloat. But, unfortunately, traditional banks aren’t set up to meet them. Late payments can increase the risk for banks trying to decide who to extend credit to, and without that data, banks are struggling to figure out whether a small business has closed, low cash reserves, unstable cash flow, or is behind on their existing debt.
Banks Reluctant to Lend Money To Small Businesses
If you’re a small business and need working capital to run and grow your business, you will likely not get money through a traditional route.
Since small businesses don’t have a steady income, it’s harder for small businesses to be approved for new credit. Even if you’re a business that makes really good revenue - there’s no equivalent for you. Simply because you don’t have a steady income, it’s harder for you to be approved for new credit.
The Problem Lies in the Traditional Credit Analysis
The biggest problem is that small businesses or startups, even those who make good revenue and profit and have an excellent credit score, look like risky applicants for banks.
Banks want to be confident that the business they’re providing loans to will be able to pay it back. Most banks commonly use credit score, revenue, business history, and collateral to quantify and decide whether an applicant is eligible for credit. But they ignore cash flow which is a much more accurate measure for a small business.
Technology such as artificial intelligence and machine learning makes it possible for traditional banks and other financial institutions to use cash flow predictive data to predict the financial future of a small business, faster. Cash flow predictive data can include past, present, and future accounting, banking, and other financial data of a borrower. Critically, it includes cash flow data supported by numerous forward-looking data points which is an important factor in small business underwriting.
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Cash Flow Data is The Way Forward
As the Coronavirus outbreak has negatively impacted small businesses, revenue and credit score are no true guarantee that a small business will be able to repay the borrowed amount, principal plus interest. As a lender, it’s a great way to access all the important information about your borrowers to make data-driven and informed lending decisions.
Cash flow predictive data has transformed the banking and financial sector and will continue to rise in the future. Today, many financial institutions across the world are able to access cash flow predictive data with the help of financial single APIs. There are a lot of FinTech firms that are creating ground-breaking APIs using ML and AI that lenders can adopt to determine creditworthiness, reduce credit and make better decisions.
Cash flow predictive data helps fill in what's missing from traditional underwriting data to make lending more inclusive. Moreover, it can also help lenders extend credit to small businesses that have just started their new venture, or have limited or no credit history - which will be particularly relevant in the wake of the Coronavirus.
