High interest rates and volatile markets challenge small businesses. Yet, these resilient entrepreneurs remain the backbone of the economy, creating jobs and driving growth even in turbulent times. For lenders, this presents both a challenge and an opportunity: how can they meet the capital needs of small businesses when their borrowers increasingly lack traditional credit and collateral? For many lenders, a business’ cash flow represents an optimal path to qualify more borrowers and scale loan books.
Table of contents
Cash Flow Lending: A New Approach to Risk and Opportunity
This shift to cash flow is a recalibration of how lenders view risk, value, and opportunity. By focusing on a business’s revenue streams instead of its credit history or collateral, lenders are aligning growth strategies with the realities of modern business and unlocking growth for their borrowers and themselves.
At Ned, we believe that cash flow is transforming the lending landscape and that it will uniquely define its future.
For decades, the small business loan remained unchanged: fixed repayments, principal and interest, and strict credit requirements. The antique lending practice excludes countless viable businesses—particularly those with unique revenue cycles or operating in underserved sectors or geographies. The traditional underwriting methods fail altogether to capture nuanced financial realities of businesses with irregular cash flows, seasonal revenues, or limited assets to pledge as collateral.
Within this paradigm, both lenders and borrowers become stifled. Lenders in particular struggle to qualify fundamentally strong businesses, leaving them unable to grow loan books or diversify risk. This is all compounded further by outdated systems and labor-intensive workflows, making it difficult to serve a range of customers efficiently.
The Benefits of Cash Flow Lending
Cash flow lending offers a way out of this gridlock. By evaluating a business’s revenue streams and repayment capacity in real-time, lenders can extend capital to businesses that might not meet traditional credit or collateral requirements. This approach is particularly valuable for businesses in inventory-heavy industries, those with delayed revenue cycles, or service-oriented sectors where tangible assets are scarce.
For lenders, the benefits are twofold. First, cash flow underwriting reduces the time and cost associated with loan qualification. By streamlining processes and leveraging technology, lenders can approve applications in days rather than weeks. Second, it opens the door to new markets, allowing lenders to serve businesses in previously untapped sectors or geographies.
In a prior white paper, Cash Flow Amidst the Credit Crunch, I describe how lenders embracing cash flow strategies share a commonality: resilience. In a competitive and unpredictable market, these lenders recognize the need to innovate, adapt, and grow. They are reimagining their operations and products to meet the needs of modern borrowers while future-proofing their business models.
This transformation starts with culture. At Ned, we’ve seen that successful lending leaders foster open-minded, customer-centric organizations that embrace change and encourage experimentation. They view challenges as opportunities to iterate, learn, and improve. This mindset extends to their operations, where flexible workflows and scrappy solutions allow them to navigate obstacles and implement new practices without disrupting core functions.
Cash flow lenders are also driven by a growth priority. To remain competitive, they must scale their loan books and qualify more borrowers. However, scaling requires addressing the systemic inefficiencies that have long plagued small business lending: fragmented systems, manual workflows, and a lack of transparency.
By investing in integrated technologies and streamlined processes, lenders can reduce costs, improve visibility, and enhance the borrower experience. For example, some traditional lenders are designing revenue-based financial products tailored to specific growth objectives. These products, coupled with cash flow underwriting criteria, allow lenders to deploy capital quickly and adapt to borrower feedback without significant operational disruptions.
Creating a More Inclusive Financial Ecosystem
The shift toward cash flow lending isn’t just about improving operational efficiency; it’s about creating a more inclusive financial ecosystem. By prioritizing cash flow over credit and collateral, lenders can support a broader range of businesses, from startups with limited track records to established firms in need of flexible financing options.
As the financial landscape continues to evolve, the importance of cash flow lending will only grow. Lenders that adopt this strategy are not only positioning themselves as leaders in the market but also contributing to a more resilient and equitable economy. By reimagining underwriting practices and designing products that align with borrower needs, they are unlocking the full potential of small businesses while scaling their own organization.
In an era defined by uncertainty, one thing is clear: the future of lending belongs to those who prioritize cash flow. It’s a win-win that benefits lenders, borrowers, and the economy writ large.
