Why the Way Independent Workers (#gigworkers) Get Loans is All Wrong.

Bree Thomas

When I tried to buy my first house, I made less than minimum wage... on paper.

I bought my first house with my best friend, Steph. Seasoned bartenders, we made a good living. There were two issues for our mortgage lender:

  • Proving income with paystubs. Much of our income was made in cold-hard cash.
  • Credit score. We were cash fat and credit thin.

As tipped workers, we only made half the hourly minimum wage per shift. With cash always on hand, we steered clear the trappings of credit cards. This meant two things in securing a loan:

  • We were treated like clowns. Forced to jump through a ton of hoops to prove our credit worthiness.
  • Our loan terms were a joke. We were awarded one of those no-good-very-bad-balloon-loans they were handing out like candy before the 2008 housing crisis. We sold before the crash, but it was a sobering realization of just how bad that decision could have hurt us in the long run.

But cash is hardly a thing anymore, so proving income is easy, right?

After a 16-year hiatus, I’m picking up bartending shifts again (#founderlife). The biggest difference between then and now is the absence of cash. Nobody pays with cash anymore.

There are not enough cash sales to cover our nightly tips from credit cards. We used to take home all our tips in a single night. Now we take home the cash tips, and the credit card tips are added to our bi-monthly paycheck. Here’s an example of a nightly tip-out.

$118 cash in hand, and $237 in credit card (CC) tips will be added to the next paycheck.

Our paystubs are beefier, but they still don't paint the full picture.  

The obvious downside of less cash today is that I no longer take home all the money when I make it. If it worked this way in the “old days” it would have made proving my income a lot easier. It still fails in two ways:

  • Consistent income (”steady paycheck”). My paystubs are always different.
  • Actual earnings. A not-so-secret truth is that many of us leave our cash earnings out of view from the IRS whenever possible (#sorrynotsorry). Or consider the independent contractor who deducts as much as possible, because they can and should, but then gets short-changed on the loan application because it looks like they barely make ends meet.

Well at least it’s easier to build credit these days, right? Buy-Now-Pay-Later is all the rage.

I’m sure you’ve heard of Affirm, Afterpay, or Klarna by now. These popular “buy now, pay later” (BNPL) services are nothing new. BNPL likely began in the 1980s with department stores and exploded in popularity with the rise in digital purchasing. You would think (or at least I did) that BNPL would help folks build good credit. Not so fast.

BNPL plans are, by nature, short-term loans. As mentioned, you'll commonly pay off a BNPL purchase within three months. But when you pay off a loan and close out that line of credit, it can reduce the average age of your open accounts and potentially drag your credit score down. This is even more likely to happen if you're new to the working world and therefore don't have many long-standing credit accounts in your name.
Why 'Buy Now, Pay Later' Plans Can Hurt Your Credit Score -- Even if You Pay on Time
by Maurie Backman | Published on Nov. 2, 2022

From proving income to building credit, establishing your credibility as one who pays back loans can be a tough hill to climb if you’re an independent worker (#gigworker).

Let’s unpack that little black box called “credit score”.

Oh the fateful credit score... it was a rocky relationship when first we met. On steady ground now, I still find it can dip for the slightest of reasons — often not related to my ability to honor financial commitments.

Credit scores were not always an actual “score”.

In 18th-century America, credit worthiness was driven by hearsay, rumors, and the opinions of “well regarded neighbors”. It should come as no surprise that rich white men were favored for loans. [1]

In 1989, FICO partners with Equifax, the oldest of three major credit bureaus in the US to standardize on a credit scoring system. It was created to bring a more objective lens to evaluating a person’s credit worthiness.

Not much has changed since 1989, here it is a nutshell [2]:

  • Lenders report you to the credit bureaus for good or bad behavior, but always at their discretion (so that part is still subjective...🤔).
  • Credit bureaus organize your information into a credit report.
  • Companies like FICO make algorithms that calculate credit scores. FICO is the de-facto leader in the US, but The Vantage Score is a new-ish competitor, established in 2006. The Vantage Score was created by the three big credit bureaus: Experian, TransUnion, Equifax (pfft...it’s feeling more objective already. 😏)
  • Lastly, lenders apply an algorithm to one of your credit reports when you apply for credit. This determines whether you qualify for the account. Yes, these are the same lenders that decide whether or not to report behavior (good or bad) to the credit bureaus in the first place.

Naturally, there have been complaints about our credit scoring system. [2]

  • The lasting effects of historical bias put many Americans at a disadvantage in building good credit.
  • Mistakes happen on credit reports all the time. They are a long pain-in-the-arse to fix.
  • Reporting credit (good or bad) is voluntary and at the discretion of the creditor.
  • The credit scoring system is complex and most people lack an understanding of how it works.

“Building credit” often comes at a price you don’t expect and can’t afford.

While building good credit can open a lot of doors, I’m guessing many of us know how quickly it can get out of hand. Jillian Williams of Cowboy Ventures covered the complicated and often confusing relationship our country has with credit card debt. Her findings reminded me of my once rocky relationship with my own credit score. It’s easy to fall back into bad habits when a good credit score earns you so much spending power. It’s practically engineered to be a vicious cycle.

As both generations [Millenials & Gen Z] have aged, it’s clear that neither generation has stayed away from credit cards, and we don’t believe that future ones will either. Credit cards are not inherently bad. They help build credit and may come with more rewards and perks versus debit cards. However, what is concerning is the all-too-easy debt trap due to the lack of financial education and overspending that we have seen across generations.

In 2019, credit card debt hit a high of $926bn, with many lenders expecting pending defaults. 6 months later, however, that debt fell to $811bn, citing the largest 6-month decline ever
However, as we exited the pandemic, these high debt levels have skyrocketed, as credit card debt has reached a new high of $930bn. Q3 saw the largest annual increase in 20 years, with balances rising across age groups and income levels. At the same time, the personal savings rate in the US has plummeted, and the cost of that debt is getting increasingly expensive as interest rates continue to rise.

The Fable and Challenges of Credit Cards in the US, Jillian Williams, December 13, 2022

Here’s the truth. Today’s options for determining credit worthiness are not great for the independent worker (#gigworker). If we borrow a page out of the commercial lending book however, I think you’ll find there’s some very interesting financing food-for-thought.

It starts and ends with cash flow.

How would judging credit worthiness on cash flow be different?

Let’s start with a cash flow loan and how it’s different.

A cash flow loan is a type of unsecured borrowing that is used for day-to-day operations of a small business. The loan is used to finance working capital—payments for inventory, payroll, rent, etc.—and is paid back with incoming cash flows of the business.
Cash flow loans are not considered conventional bank loans, which entail a more thorough credit analysis of a business. Instead, a lender makes an assessment of the cash flow generation capacity of the borrower when determining the terms of a cash flow loan.

Cash Flow Loan (Investopedia), By James Chen, Updated July 30, 2021

Cash flow lending is judged by your capacity to generate cash flow. 🤯

Since no collateral is being provided, the bank focuses on the quality of your accounts receivable, accounts payable and inventory turnover to see how you are managing your cash flow. Bankers like to see customers who are of good quality and pay as per their terms, suppliers being paid on time (though not too early) and rapidly moving inventory items.

What is a cash flow loan?, BDC

Let’s imagine the cash flow loan criteria for an independent worker.

  • Accounts Receivable (income): what shifts, projects, gigs do I work consistently and what is the cadence of those earned payouts?
  • Accounts Payable (expenses): am I meeting my monthly obligations (rent, utilities, Netflix, etc) on time? Do my accounts look healthy (no overdraft fees and something to show in savings)?
  • Inventory Turnover: what are the ebbs and flows (seasonality) of my work? Have I demonstrated an ability to weather those ebbs and flows?

The independent worker has two levers to pull: how much they spend and how much they earn. They look ahead to mitigate issues and capitalize on opportunities for their time. Time is money for them after all. Their cash flow says a great deal about their ability to meet financial commitments.

Is cash flow really a good proxy for getting a loan? Sounds too good to be true.

At the end of the day, determining your credit worthiness is about your ability to meet various financial obligations. In the US, we’ve grown accustomed to our system of credit scoring.

However, our credit scoring system is a pretty arbitrary way to assess borrower risk. Americans only invented credit scores in the late 1980s, and other countries have credit scores that work very differently.

What Countries Have Credit Scores and How Do They Work?, By Nick Gallo, Updated on Oct 6, 2022

Examples from Nick’s article ☝️include:

🇩🇪 Germany deems you worthy for lending unless you prove otherwise.

Interestingly, the standard SCHUFA score is a percentage that ranges from 0% to 100%. All consumers begin with a perfect credit score of 100%, but it decreases as you pay bills and handle credit. The more responsible you are, the less it goes down. If you can stay above 97.5%, you’re in the top credit tier.

🇳🇱 The Netherlands - no actual “score”.

In general, lenders report to the BKR anytime they issue a consumer credit account for more than $250 with a repayment term longer than a month.

Interestingly, there’s no actual credit score in the Netherlands. Neither the BKR nor any independent companies within the country issue them. Instead of a score, lenders simply review your BKR file to determine your creditworthiness.

🇫🇷 France coming in strong with a model that prioritizes cash flow as proof of credit worthiness.

To top things off, there are no credit scores in France. Being creditworthy generally means having no negative remarks in your history. As a result, lenders can’t differentiate between someone with excellent credit and zero credit history.
Of course, they do have a way to assess a borrower’s creditworthiness beyond checking for historical problems. Generally, when you apply for a credit account in France, you have to submit your bank statements and payslips from the last three months.

Got proxy? Check. Check. And Check. Time to shift our focus.

The US gig economy is growing 3x faster than the US workforce as a whole.

Independent workers are on track to the be the new working majority in as little as five years. They take a different view of their money and so should our financial systems.

It’s time we brought a more inclusive lens to a grossly underserved market.

The dominant lending options for gig workers today are predatory at best and downright sinister at worst. Consider the “same day cash” or “get your payday early” promises of sleazy lenders looking to capitalize on the gig-to-gig/paycheck-to-paycheck cycle. Or even that terrible-awful-no-good-very-bad-loan I mentioned with my first mortgage.

We can do better.

There is value in a “Cash Score” for the independent worker (#gigworker).

Our financial systems were built for and around the traditional salaried worker, because their income is easy to predict.

Steady paycheck = less risky investment.

But the variable income worker predicts their income all the time.

It’s how they build their schedules, manage their day-to-day, and adapt their spending in real-time. The independent worker’s desire to control their work-life balance should be viewed as an opportunity, not treated as a risk. Evidence of an ability to meet financial obligations can be found in their cash flow. So how about we start prioritizing a “Cash Score” when determining credit worthiness?

There are some US companies already catching onto the value of a “Cash Score”. Consider Petal, a credit building app that looks at more than just your credit score.

Petal can look beyond just a credit score and consider responsible spending and saving behavior.

Responsibility to meet your financial commitments is what it’s all about at the end of the day. An independent worker’s cash flow is an indicator of how they deploy their time, or rather — how they run their business. They are, essentially, a business of one.

Let’s afford them the respect they deserve and assume they’re responsible until proven otherwise.


[1]  https://time.com/3961676/history-credit-scores/

[2]  https://finmasters.com/when-were-credit-scores-invented/#gref