Cash Flow Lending Drives Today’s Economy, Not Tomorrow’s
Guest-Post by David Silverstein: An up-and-coming, no-brainer unlocking of potential
If you lend a business cash, what is the best predictor of getting that cash back?
Don’t overthink it.
The answer is...cash.
Today’s post is by David Silverstein, Founder + CEO at Ned, software for cash flow underwriting. When it comes to low-hanging fruit for capitalism, David’s tech picks what is already ripe and waiting.
Cash Flow Lending Drives Today’s Economy, Not Tomorrow’s
The Move to Cash Flow Underwriting: Unlocking Potential
With approximately 31 million businesses in the U.S., and an estimated 10 million underfinanced each year due to credit or collateral challenges, widely adopting cash flow underwriting within lending organizations represents a monumental, once-in-a-century opportunity to release billions into communities and stimulate serious economic growth.
Outdated Underwriting Methods Challenge Lenders
Today’s underwriting relies heavily on assessing the borrower’s credit history and collateral. Many small businesses, especially new ones, lack a credit history and sufficient assets to pledge, disqualifying them from traditional capital products.
This collateral requirement is specifically problematic. Small business owners need to be asset-light today, but lenders still require assets for financing.
This misalignment leads to time-consuming underwriting, complex creditworthiness analysis, and friction with borrowers. No one wins—lenders struggle and small businesses suffer.
Cash Flow Underwriting Emerges as a Route Forward
In contrast, cash flow underwriting evaluates a business’s ability to generate revenue and maintain positive cash flow. This approach focuses on the business's performance and potential, rather than its credit history or collateral.
By embracing cash flow underwriting, lenders can unlock growth and provide financing to solid businesses otherwise excluded from traditional lending. This benefits both lenders and businesses—capital gets deployed and cycles back to the lender, small businesses thrive, and new jobs are created.
Cash Flow Underwriting In Practice
Let’s take a restaurant that wants to open a new location. The owners pay rent, so they don’t own property, and they lease most equipment. It’s a great business that operates profitably.
The owners need $120,000 to lease a new location, purchase supplies, and hire employees. They shop for a loan at four lenders and get rejected by three. They are in the market for a three-year working capital loan.
Three lenders say no because the restaurant lacks assets. However, one lender recently implemented a tech-driven cash flow underwriting capability and sees potential in the business’s fundamentals.
The lender sizes the loan against revenues and notices that the restaurant is seasonal, and that 60% of their revenues come in Spring and Summer, but over time they have cash flow to deliver against repayments. What’s more, the restaurant might even have the ability to pay off early.
The borrower gets approved after a quick underwriting process because the lender can easily forecast revenues and size the loan appropriately. They even provide the borrower with two options - they can either take a fixed repayment loan or a revenue-based repayment loan, to provide some flexibility given seasonality. Capital is deployed, and the loan is repaid successfully because the lender maintains ongoing cash flow visibility.
Separately, the three lenders that rejected the business realize they missed an opportunity. This begins happening more and more, and they consider making changes to their lending operation.
The Big Picture
Given the scale of the small business sector in the U.S., the shift to cash flow underwriting holds real promise. With 10 million businesses underfinanced each year, billions can be unlocked for businesses that otherwise struggle to secure financing.
Cash flow underwriting isn’t just helping legacy lenders, it’s making it easier for new lenders to enter the market altogether.
When it’s cheaper and and more straightforward to underwrite a loan, and faster to deploy dollars, the door opens for those emerging lenders that otherwise might have hung back - tech companies who aspire to finance their SMB customers directly, accelerators or incubators that can finally get their first fund off the ground, the list continues.
More tech-enabled cash flow lenders means more money available to small businesses. At Ned, we’re seeing customers increase deployment - a lender that developed a capital product for retail-oriented in Tennessee, another that’s built a new, flexible offering for Kansas City businesses. The outcomes are unique and powerful.
This means there’s more options to move forward and pursue growth for businesses that typically had a harder time. Slightly newer, service-related businesses, those that need to flex to meet inventory requirements, brick and mortar businesses that need to replace equipment or expand. We’ve seen close up how lenders are using cash flow underwriting to meet their customers’ needs, on their terms.
There’s no doubt that we’ll see new jobs, innovation, and stronger small businesses as the outcome.
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