Meet Small Businesses’ Working Capital Needs with Alternative Data

Small businesses are the backbone of any economy and account for much of the economic activity. As of 2020, small businesses in the U.S. make up 99 percent of all firms, while in India, they make up roughly 95 percent of the industrial units in the country. Although small businesses account for a large portion of economic activity, they often face difficulties when seeking working capital for cash-flow issues, expansions, renovations, or remodelings. 

These business owners have often turned to friends or families for assistance, but those options aren’t always available due to current economic distress. Here’s how alternative data can help expand small business credit access. 

Traditional financial institutions shut out small businesses

Small businesses are often underbanked due to traditional banks’ hesitance to lend to them, leaving them in a bind. Additionally, the time required to process and disburse funds makes traditional banking options less feasible. For small businesses, the need for capital is often immediate, with many businesses needing loans for as little as $500. During the pandemic, Square Capital has found that 97 percent of the loans provided fell under $50,000. 

The time required to process and disburse funds makes traditional banking options less feasible.

Alternative lenders offer new opportunities

To address the issues that small businesses face regarding their working capital needs, innovative financial institutions like Ondeck, Kabbage, Square Capital, and Smartbiz have started offering lending solutions geared towards these businesses. These options are made more possible thanks to the increased access to technology and rapid digital transformation in developing and developed markets. However, there are still many limitations related to financial services and the credit assessment process. 

A different take on creditworthiness

The interest rate charged by many lenders varies from 7 to 35 percent for short-term loans. This high variability is mainly due to traditional bank’s antiquated credit assessment standards that small businesses can’t always meet. For example, the minimum credit rating for qualification starts upwards of 550-650. These standards leave small businesses and business owners who have yet to establish a credit profile or have been impacted by the ripple effects of the pandemic in a challenging position.

 

Learn how to harness the power utility payment histories for credit risk decisioning 

 

Amid increased competition and risk related to current economic conditions, some lenders tightened their wallets and upped their credit requirements. For alternative financial institutions, this was the opportunity to capitalize on their existing, more inclusive lending standards. As for more traditional banks and credit unions, now’s the perfect time to reimagine creditworthiness and meet working capital needs. By decreasing reliance on traditional credit data and considering changing risk profiles and market trends, credit accessibility can improve for small business owners.

How traditional and alternative lenders can improve small business lending

While alternative lenders make credit and lending opportunities more accessible for small businesses, there’s still work to be done. Many companies like Square and Paypal provide capital support only to businesses associated with their billing platform. This is mainly because a predictive AI-based model decides the creditworthiness and prequalification limit. Though it might look like a safe bet, it dramatically limits the lending capabilities. 

Utility payment histories can provide greater visibility into the payment behavior of thin and no file business owners, helping financial institutions increase their revenue and gain a competitive advantage.

Given that capital lending business brings in 25 to 50 percent of total revenue, limiting the qualifications to the only platform associated businesses is simply limiting the lender domain. Urjanet’s alternative data platform can help increase capabilities by providing reliable consent-based utility data to widen serving domains. Utility payment histories can provide greater visibility into the payment behavior of thin and no file business owners, helping financial institutions increase their revenue and gain a competitive advantage.

Adopt alternative data in credit decisioning to satisfy working capital needs

Small businesses, especially those in the manufacturing industry, need recurring capital for businesses. Invoice discounting is an invaluable source of working capital throughout the month, which in turn helps hedge risk. However, creditworthiness in these businesses has historically been subjected to brand serviced, historical invoices paid, past delays, and insolvency risk. Alternative data from utility and telecom payments can aid future credit risk assessments.

Now more than ever, small businesses need better financial access to meet their working capital needs. Urjanet provides automated, direct, and reliable access to utility payment histories to support credit risk decisioning.

If you’re ready to learn more about expanding credit access and meeting the working capital need of small business owners, contact one of our experts today to get started.  

You might also be interested in:

• 3 Steps to Mitigating Small Business Lending Risk in the COVID Era
• How Incorporating Non-Traditional Data Into Credit Risk Decisioning Can Drive Growth
• Innovative Applications of Alternative Data Across the Financial Services Customer Lifecycle

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