Using Global Cash Flow to Solve the Two-Pocket Problem in Small Business Lending

Sal Trifilio

Sal Trifilio

May 03, 2022

global-cashflow_Global Cashflow

Small business lending has always been difficult for community banks and credit unions, but there are two factors in 2022 that are exacerbating the problem. The first is a pandemic that has acutely affected the small business community and forced business owners to get creative with how they manage their money. The second is increasing pressure from alternative lenders who are capturing new customers with promises of better, digital experiences and faster approvals than traditional financial institutions.

To overcome these obstacles and better support their customers, banks and credit unions need to get at the heart of the issue: small businesses’ “two-pocket problem”.

Small Business Owners Have a Two-Pocket Problem

Arguably the most difficult aspect of lending to small businesses is assessing credit worthiness. While some businesses have multiple owners—contributing to lending complexities—all suffer from the two-pocket problem.

To understand the two-pocket problem, consider the simplest of businesses: a sole proprietorship. In this case, the business is owned by a single individual. But this person, as the sole owner of the business, is still occupying two roles in the financial world, that of the business owner and that of the private consumer.

The two-pocket problem occurs when this individual intertwines their financial lives (as most business owners do) until they’re essentially dependent on one another. It’s like having two back pockets, one holding a business wallet and the other a personal one. When one pocket goes empty, the individual dips into the other, and vice versa.

This type of financial maneuvering, while common, becomes a “problem” when banks and credit unions are unable to easily ascertain a business’s credit worthiness because of the back and forth. For the borrower, the two-pocket problem could create the illusion that they’re a risky business to lend to, when in reality they’re a safe bet.

And during the pandemic, when small businesses struggled mightily through lockdowns and in-person restrictions, that kind of back-and-forth maneuvering became more prevalent as owners fought for survival.

The Only Solution to the Two-Pocket Problem

When business owners intertwine their financial lives, they run the risk of creating the appearance of a lack of credit worthiness as a business owner or a consumer.

To win good relationships and avoid potentially bad ones, banks and credit unions need to understand the whole picture through a global cash flow analysis.

By running a global cash flow analysis, a lender can see through the illusions created by the two-pocket problem, and understand the true credit worthiness of their applicant.

When done manually, however, a global cash flow analysis can significantly lengthen the underwriting process—and this is where traditional banks and credit unions are losing out to alternative lenders.

Expediting Global Cash Flow as the Two-Pocket Problem Proliferates

While traditionally done inside of spreadsheets, Numerated’s loan origination system includes a global cash flow analysis as part of its spreading automation and financial analysis product. The product automatically pulls both business and personal credit data into the underwriting process, making it easier for banks to adjust a spread and get a true understanding of a business’s credit worthiness than if they were doing the analysis manually or by using a traditional LOS.

Leveraging technology, like Numeraterd’s LOS, allows traditional banks and credit unions to provide an easy and efficient experience to their borrowers and back office, allowing them to compete with alternative lenders on rates, service, and speed.

Learn more about how Numerated can help you expedite underwriting—including global cash flow analysis—and solve the two-pocket problem by contacting us today.

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