Uncovering SMB funding insights in bank statement data

A complete understanding of applicants’ financial health is critical for small business funders. These funders analyze financial data from various sources daily to determine creditworthiness, connect borrowers with capital and make informed financial decisions.

However, small business funders relying on traditional underwriting sources, such as credit bureau data, may not be getting the full picture. While these sources hold valuable information, they can fall short of providing a comprehensive view of a small business’s financial health.

Cash flow data helps funders examine financial health more deeply, offering detailed insights into revenue, expenses and overall trends in businesses’ bank statements. With AI-driven document automation making these insights more accessible, small business funders can uncover opportunities to expand their business and reduce origination costs.

Extending opportunities to a broader range of applicants

Small business funders limit their ability to recognize qualified applicants when basing lending decisions on traditional credit data alone.

In some cases, credit data can push lenders away from qualified applicants. Some business owners might rely on personal credit to get their business off the ground. While this can be a first step towards a healthy and successful business, it can also take its toll on personal credit scores. When funders consider only these scores, they can overlook healthy businesses seeking working capital to continue their growth.

On the other hand, when looking at business credit, there are significant gaps. Newer or smaller businesses often lack sufficient credit information, hindering funders’ ability to build effective credit models for decision-making.

Cash flow data can help eliminate the guesswork in decision-making in these cases. With information from bank statements, funders can gain insights into businesses’ operations, health and growth. With a complete picture of financial health, funders can serve a wider group of qualified businesses that would be declined using traditional methods alone.

Mitigating risk and reducing origination costs

Cash flow insights offer benefits beyond expanded access to credit – they help funders reduce risk and origination costs in small business underwriting. 

Credit bureau costs have increased significantly, driving up origination costs. With the introduction of AI-driven automation, cash flow data is now more accessible and, in many cases, less expensive. Ocrolus processes bank statements in 10 seconds or less with automated document processing. When combining speed and cost benefits with the valuable insights provided by cash flow data, small business funders have an opportunity to improve operational efficiency.

In terms of risk management, bank statements can provide key indicators of creditworthiness, such as debt capacity and position counts, revenue and expenses, NSFs and overdrafts and recurring transactions.

Armed with this information, funders can make more educated lending decisions and continually enhance risk models based on portfolio performance. As a result, funders can mitigate the risk of default and identify potential red flags earlier in the origination process.

Moving cash flow up in the decision-making funnel

Small business funders are noticing the advantages of cash flow analysis and adapting their underwriting processes accordingly. More and more SMB funders are transitioning to a cash flow-first approach to underwriting.

This decision to move cash flow earlier in their funnel ultimately boils down to the question: “How do I make a cost-effective decision early in the process?” Funders save on credit bureau data costs by eliminating unqualified candidates via cash flow analysis rather than traditional credit analysis.

At Ocrolus, we have helped many small business funding partners make this transition by supporting retro analyses. With these, we help funders to test their models and understand how cash flow-first underwriting can help them write more loans more efficiently.

To hear a first-hand account of how this shift helped Expansion Capital Group, watch our recent live session with COO Herk Christie here: https://www.ocrolus.com/video/cash-flow-first-smb-underwriting/

To learn how Ocrolus can help your organization leverage cash flow data to better understand small businesses’ financial health, book a demo today.

Key takeaways

• Traditional credit data alone often limits qualified small business borrowers who lack credit history or use personal credit.
• Cash flow data from bank statements provides insights into business health through revenue, expenses and risk indicators.
• Small business funders are increasingly shifting to a cash flow-first underwriting funnel to cut costs and expand their lending opportunities.