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

Author

Listed:
  • Christopher M. Hair
  • Sabrina T. Howell
  • Mark J. Johnson
  • Siena Matsumoto

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.

Suggested Citation

  • Christopher M. Hair & Sabrina T. Howell & Mark J. Johnson & Siena Matsumoto, 2025. "Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow," NBER Working Papers 33367, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:33367
    Note: AG CF PR
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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