Relying on historical data has long been the standard in institutions’ financial decision-making, but cash flow underwriting seeks to rewrite this long-standing story. Investors analyze past performance to identify the best stock picks of today. Small businesses review last season’s sales to plan for the new year. And lenders, of all stripes, have used credit scores, which rely upon a relatively limited set of data points from the past to determine a borrower’s ability and willingness to pay going forward.

But imagine being heavily assessed on who you were, rather than who you are today? Imagine if job applications and hiring managers relied only on your entry level work, as opposed to the built up experience and responsibilities of the more recent past? Traditional credit decisioning relies on credit history data that is frustratingly slow to respond to positive changes in behavior, limited in context, and for some borrowers, may not even exist.

Enter cash flow underwriting, a rapidly growing approach to underwriting being used by national and regional banks, financial technology companies, and nonprofits alike. Credit reports offer static insights about the past, similar to a photograph; cash flow underwriting provides a view into the real-time, financial motion picture of an individual.

Cash Flow Underwriting: Expanding Opportunity with a Real-Time Tool

Cash flow underwriting is an approach to making credit decisions that analyze real-time financial activity from individual transactional accounts in order to identify spending patterns, various income types, and debt management trends, providing lenders with a broader, more inclusive, and faster assessment of a person’s ability and willingness to pay. Paired with traditional credit risk assessment, cash flow underwriting allows lenders to both safely expand their borrowing pool and provide those borrowers with access to more accurately priced credit.

A limitation of using only traditional credit scoring is the lack of insight into current financial management, relying almost exclusively on past credit behavior. For instance, even with recent changes, credit bureaus may not  capture on-time rent or utility payments, often a strong indicator of financial stability and willingness to pay. Cash flow underwriting can also complement the more static data of credit scores by providing real-time insights into spending patterns, helping spot moments of distress or opportunity faster.

Read the full article about cash flow underwriting by Evelyn Stark and Tanya Ladha at ideas42.