3 Steps to Mitigating Small Business Lending Risk in the COVID Era

Honor Donnie  |  September 30, 2020   |  Credit & Lending  |  ID Verification  


Small businesses have been particularly hard-hit by the pandemic’s effects, but financial institutions that lend to small businesses have acted as a critical lifeline. While a few institutions are scaling back on small business lending, over 50 percent of lenders have maintained or increased lending to small businesses, even exclusive of Paycheck Protection Program (PPP) loans. 

For institutions that are maintaining and growing small business lending, alternative data strategies can help mitigate risk and compete for the shrinking pool of creditworthy borrowers, especially in today’s uncertain economic climate. Across the customer lifecycle from onboarding to portfolio management, data sources beyond traditional credit data can reveal more about small business borrowers and improve decision-making. Let’s take a look at three steps that can help minimize small business lending risk in the COVID-19 era.

1. Digitize KYB processes to shorten onboarding times    

Verifying small businesses and satisfying KYB compliance can be lengthy and tedious with all the manual checks and physical verification involved. Still, the launch of the PPP sheds light on a significant lack of data on small businesses. No central information repository exists for small businesses and traditionally used data sources don’t always include newly formed businesses.

Identity verification delays can lead to poor customer experiences and even abandoned account openings. For internal staff, labor-intensive manual processes are also more error-prone and costly. That is where the need for digitized onboarding processes comes in. In a competitive small business lending marketplace, a simple onboarding process can make a world of difference. 

API-integrated solutions that connect to credible data sources can automate verification processes – improving customer onboarding and efficiency.

71 percent of small and medium businesses consider a bank’s onboarding process and self-service tools while selecting a new bank. Implementing digitized KYB processes like API-integrated solutions that connect to credible data sources can automate verification – improving customer onboarding and efficiency. Using multiple data sources also provides greater assurance that the business is valid.

2. Enhance traditional credit data with consent-based alternative data  

Challenging economic times have amplified the need for more precise credit risk assessment. That’s why lenders should aim for a more holistic view of a company’s financial position. With 37 percent of small businesses experiencing supply chain disruptions, lenders need better visibility into business and financial behavior. Integrating traditional credit data with consent-based alternative data sources provides a more complete story for lenders to evaluate. 

37% of small businesses are experiencing supply chain disruptions, creating the need for lenders to look for better visibility into business and financial behavior.

Alternative data sources like social media and eCommerce data as well as utility, telecom, and rent payments can reveal if a business is starting to experience financial distress. Warning signs can be recognized through late payments to landlords, employees, utility companies, and other suppliers. With enhanced risk assessment, lenders can also provide more tailored offers that better align with the borrower’s true risk profile.

3. Monitor portfolios with periodic identity and credit risk monitoring

The unpredictable nature of the economy will likely lead to more volatile portfolio risk levels as time goes on. Moving forward, periodic identity and credit risk monitoring of portfolios will help lenders better identify illegitimate businesses and changing financial performance. The PPP didn’t just generate a surge in loan applications; it also led to a rise in fraud, resulting in $175 million in stolen funds. 

Leveraging alternative data sources can help lenders protect against fraudulent borrowers. Tightening up business verification practices on the front end, as well as adding ongoing periodic checks, can reveal illegitimate businesses. Similarly, by incorporating consent-based data into the credit monitoring process, lenders can obtain automated recurring access to account data via an API, minimizing customer friction while gaining valuable information. 




Mitigate small business lending risk with alternative data sources

Digitizing small business lending processes with the use of alternative data will serve to benefit both lenders and small business owners. With automation and a digitized KYB process, lenders can reduce fraud and improve the overall customer experience. Urjanet provides lenders with automated and direct access to data from thousands of utility providers to provide additional insight into decisioning and verification. 

To learn more about how Urjanet helps support small business lending onboarding processes, contact us today



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About Honor Donnie

Honor Donnie is a Marketing Intern at Urjanet, with a passion for content creation. When she’s not at Urjanet, she can be found studying Political Science at Clark Atlanta University.