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

98 Pages Posted: 13 Jan 2025

See all articles by Christopher Hair

Christopher Hair

Brigham Young University

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Mark J. Johnson

Brigham Young University - Department of Finance

Siena Matsumoto

NYU Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2025

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.

Keywords: JEL: G21, G23, G32, J15, J16 Age, Lending, Entrepreneurship, AI, Fintech, Alternative Data

Suggested Citation

Hair, Christopher and Howell, Sabrina T and Johnson, Mark J. and Matsumoto, Siena, Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow (January 11, 2025). Available at SSRN: https://ssrn.com/abstract=5093589 or http://dx.doi.org/10.2139/ssrn.5093589

Christopher Hair

Brigham Young University ( email )

Sabrina T Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.sabrina-howell.com

National Bureau of Economic Research (NBER) ( email )

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Mark J. Johnson

Brigham Young University - Department of Finance ( email )

Provo, UT 84602
United States

HOME PAGE: http://sites.google.com/view/markjohnson/home

Siena Matsumoto

NYU Stern School of Business ( email )

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