Cashflow Lending

We are seeing a new paradigm in lending, moving away from asset lending to underwriting on the user’s cash flow data. I have two questions.

Is anyone using this new paradigm already?

  1. What are the top challenges in bringing this to life?
  2. What are some missing pieces?

From a business lending perspective, NBFCs lending to micro and small enterprises already have cash flow based underwriting models (and sometimes a mix of cash flow and asset backed) - including capital float, neogrowth, aye finance to name a few. This borrower segment is often turned down by banks because of a lack of credit history/poor record keeping.

One challenge I can think of - these models necessarily need to be highly tailored, because cash flow for businesses can vary based on type, size of the enterprise, season/time of the year, location etc - not one size fits all. The NBFCs lending to them are often specialized and focus on one sector/segment (eg. there are lenders who do targeted school financing, aye finance mentioned above works only with micro-enterprise ‘clusters’). Not sure what ‘standardization’ could look like in this context.