Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow
98 Pages Posted: 13 Jan 2025
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Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow
Modernizing Access to Credit for Younger Entrepreneurs: From Fico to Cash Flow
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
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