Securing funding for a start-up can be daunting work. No matter how much capital a start-up begins with, ensuring a steady cash flow offers the advantage of mitigating financial loss. As one financial expert puts it, a weak cash flow is one of the ‘seven deadly sins’ of start-ups and one of the root causes of start-ups failing in their infancy.
An American bank’s survey in the early 2000s showed eight out of ten businesses failed due to poor cash management. Contributors range from excessive spending to overestimation of future growth. Entrepreneurs have to understand that everything in business costs money, especially in making a profit.
In recent years, however, the business climate has changed with the rise of credit card companies serving underbanked clients. Among these companies are Petal, Nova Credit, and Deserve. Here’s an in-depth look at how these companies are changing start-ups and their contributions to the industry:
Founded in 2016, this New York-based start-up aims to “bring financial opportunity and innovation to everyone.” It employs big data and machine learning to evaluate a person or business’s financial integrity, similar to gathering and analyzing business data efficiently to promote workforce intelligence. The expected outcome is a financial profile that paints a clearer picture.
Understanding Petal’s business model presupposes knowing the system it strives to change. Until now, financial portfolios have hinged on two things—bank history and credit score. While they offer sound data, they only scratch the surface and they don’t say much about how the client achieved the portfolio. Petal’s system of working around these limitations can be summarized in two points.
- It takes advantage of Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring financial services to make a consumer’s records obtainable upon request. Once the consumers switch banks, they are allowed to retrieve their bank history from the previous bank, making it easier to apply for credit.
- It operates a credit scoring mechanism known as ‘cash score.’ Digital technology allows the same to expound on credit score data by gathering information such as the client’s location, utility, and mobile. Given the immense data required, this mechanism is less likely to work without machine learning.
Also founded in 2016 but located in San Francisco, Nova Credit uses an alternative credit scoring system called a NovaScore. It translates a client’s international credit score into a U.S. credit score, allowing clients migrating to the U.S. to secure loans and the like. As of this writing, Nova Credit is only available in eight countries overseas.
Before Nova Credit, overseas companies wishing to do business in the U.S. had to build their credit scores from the ground up. Credit scoring works differently in other countries, including their score metrics. In the U.K., which Nova Credit currently covers, the score ranges from 0 to 999 for Experian, 0-710 for TransUnion, and 0-700 for Equifax.
The company also performs a ‘soft inquiry’ on a client’s credit history, overlooking the credit score in favor of other factors. Soft inquiry allows a person or start-up with a low credit score to qualify for loans, granted there’s enough documentation to check. It also won’t impact a client’s credit score, unlike a hard inquiry that usually comes after.
Formerly known as SelfScore, Deserve is the oldest of the three, founded in 2013 and based in San Francisco. Whereas Petal and Nova Credit serve clients with an established credit history, Deserve serves those without one at all. It’s popular among American and international students, given that they have to secure student loans with little to no credit history.
For this, the company evaluates clients based on different metrics that highlight potential instead of risk. Among these metrics include current financial health, employability, and earning potential. It’s not unusual for students to form their start-ups during college, and Deserve can be helpful for this purpose in the long run.
Teaching students responsible credit management helps avoid potential pitfalls later on, and Deserve also offers resources on the subject. The company currently covers credit management for students at over 5,000 institutions and growing.
The emergence of these start-up credit card companies signifies the end of an era—the days where persons and businesses are getting denied due to lack of established credit history are slowly fading away. Technology and growing awareness for responsible credit management will give future start-ups a better chance in the competitive market.