Publications
Measuring Small Business Financial Health With Cash Flow Data
Market Context Report
Report Summary
Small businesses play a critical role in driving community and national economic growth. Yet they often face challenges in managing liquidity, especially in their early years, leaving them vulnerable to financial shocks and increasing the risk of failure. Developing more precise, real-time measures of small business financial health would enable financial institutions and small business support organizations to better understand these challenges, tailor their products and services, and strengthen the resilience of the businesses they serve.
This report lays the foundation for a broader FinRegLab project exploring how financial health frameworks—which are designed to provide a structured assessment of finances across dimensions such as stability, resilience, and growth—and digital banking data can provide a more holistic picture of small businesses’ financial conditions and needs. Building on prior approaches to defining and measuring financial health that have primarily focused on consumer contexts, the report proposes a working framework for small business financial health measurement and outlines potential metrics for testing.
The report also analyzes the potential benefits of working with community development financial institutions (CDFIs) in conducting initial research. Because they focus on serving younger, smaller businesses and collect more extensive documentation about entrepreneurs’ personal finances than other lenders, CDFIs may be able to provide unique insights into the relationship between business ownership and household financial wellbeing. At the same time, using cash flow data could potentially substantially expand and strengthen CDFIs’ efforts to measure the impacts of their programs.
Finally, the paper briefly outlines considerations for financial institutions beyond CDFIs in deepening measurement of small businesses’ financial health, which FinRegLab will explore through further qualitative research and convenings throughout the project. Early research and interviews suggest that deeper financial health insights could unlock new opportunities and create significant business value for financial institutions and their small business customers alike.
Acknowledgments
This report is part of a broader research project evaluating ways to improve small business financial health measurement through the use of digital banking data. Subsequent research will analyze cash flow metrics from CDFI small business borrowers to develop a framework and measurement approach for small business financial health. Other reports in this series are available here.
Many of the insights in this report were derived from interviews with banks, fintechs, community development financial institutions, intermediaries, researchers, and other stakeholders in the financial services, technology, and civil society sectors. FinRegLab would like to thank stakeholders who participated in interviews and discussions.
We would also like to thank the individuals who provided valuable feedback on prior versions of this report. They include:
Ruth Barber and Dawn Akers, FUND Community Institute
Laura D’Alessandro, Local Initiatives Support Corporation
Taylor Nelms and Trey Waters, Financial Health Network
Adrienne Smith and Erick Montenegro, Opportunity Finance Network
Tamra Thetford, CNote
Lastly, we would like to acknowledge the FinRegLab team for their work in writing this report:
With Support From
This research initiative is made possible through support from the Capital One Insights Center. In addition, Plaid is providing account connectivity services to the participating CDFIs to allow loan applicants to authorize their account data to be accessed for analysis. All results, interpretations, and conclusions expressed in this report are those of the authors alone and do not necessarily represent the views of its supporters.
Capital One Insights Center
The Capital One Insights Center combines Capital One research and partnerships to produce insights that advance economic opportunity. As a platform for data and dialogue, the Center strives to help changemakers build thriving communities and develop financial tools that enrich lives. The Center draws on Capital One’s deep market expertise and legacy of revolutionizing the credit system through the application of data, information, and technology.
Plaid
Plaid is a global data network that powers the tools millions of people rely on to live a healthier financial life. Our ambition is to facilitate a more inclusive, competitive, and mutually beneficial financial system by simplifying payments, revolutionizing lending, and leading the fight against fraud. Plaid works with thousands of companies including fintechs like Venmo and SoFi, several of the Fortune 500, and many of the largest banks to empower people with more choice and control over how they manage their money. Headquartered in San Francisco, Plaid’s network spans over 12,000 institutions across the US, Canada, UK and Europe.
Events
Related Publications
-
Transforming Small Business Credit: Technology and Data Adoption in Mission-Based Lending
This report details the experiences of mission-based lenders such as community development financial institutions (CDFIs) and minority depository institutions (MDIs) as they adopt electronic bank account data and lending platforms to increase lending to minority-owned businesses and other underserved entrepreneurs. The paper provides both a practical snapshot of how lenders manage data and technology adoption…
-
From Crisis to Opportunity: Financing for Underserved Small Businesses Since COVID-19
This report delves into the evolving landscape of small business lending following the pandemic, identifying significant trends that are shaping the lending ecosystem. As the economy improves, lenders will face critical decisions about how to meet the capital needs of more small businesses, including record numbers of minority- and women-owned startups since 2020.
-
The Use Of Cash-Flow Data In Underwriting Credit: Small Business Spotlight
This report details the evolution of the use of cash-flow data in small business lending. It explains the reasons why electronic cash-flow data may be particularly useful in the small business context, presents evidence of its increasing use by a diverse range of incumbents and new entrants, and notes market and policy issues that may…