Why?
“Most lenders like to see cash flow that they consider reliable, such as salary or interest income,” Foster says. “Income from private companies or capital gains are considered more volatile and have a lower probability of being consistently generated year after year. Even with a track record of successful trading activity, it is difficult for lenders to give capital gains much weight. Income from a privately held company has a better chance of being considered, but you need to work with a lender with the sophistication and willingness to understand the income source.”
Myth
Cash flow isn’t important for an individual with high levels of liquidity.
Reality
Income almost always matters more than how much money someone has in the bank. Banks and other lenders care more about seeing income that is reliable, recurring and sufficient to support a borrower’s obligations.
“Many banks consider themselves cash-flow lenders first, meaning they lend primarily based on recurring income,” Foster explains. “You could have millions of dollars sitting in cash, but if you are not actively generating recurring income to service your debts, banks can still have an issue with granting credit. Liquid assets can be used as a reason to extend credit where cash flow is insufficient, but it doesn’t have as much weight as you might think. This is not to say that maintaining high levels of liquid assets hurts you – far from it. But cash flow is usually the main driver in a lender’s analysis.”
Myth
Credit scores don’t matter to lenders when you have a high net worth.
Reality
Credit scores do matter in the eyes of bank, regardless of a borrower’s net worth—but not necessarily how you might think.