Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow
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.
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Copy CitationChristopher M. Hair, Sabrina T. Howell, Mark J. Johnson, and Siena Matsumoto, "Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow," NBER Working Paper 33367 (2025), https://doi.org/10.3386/w33367.Download Citation
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Non-Technical Summaries
- Younger entrepreneurs are disadvantaged in small business loan markets because lenders rely heavily on personal credit scores, which favor...
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