Small and midsized business (SMB) owners today can face monumental financing challenges. According to 2016 research from the Federal Reserve, "only two-fifths of firms applying for credit received all of the funding they requested, although an additional one-third received partial funding." Meanwhile, research from CB Insights found that running out of cash is the second most common reason SMBs fail.
Compounding the issue is the fact that often SMB owners might resort to using their personal credit to secure a business loan – further exposing these individuals to risk as they start or grow their businesses. SMB owners, then, may seek new ways to secure affordable lines of credit, which presents a huge opportunity for lenders.
The Benefits Of Alternative Data For SMB Owners
When it comes to proving creditworthiness, SMB owners are often caught in a chicken-and-egg scenario: A new SMB owner needs access to credit to get their business off the ground, but while their business is still emerging, they don’t have a track record of positive credit history, which is required to secure a loan in many cases.
As the CEO of a company that offers an alternative data collection and identity verification platform, I've seen how alternative data can provide SMB owners with a new pathway to credit access. SMBs in the U.S. spend more than $60 billion a year on electricity, according to Energy Star. All of this spend leaves a verified record of recurring payments that can contribute to an SMB’s credit file. Alternative lenders can use this data to fill the gap in the lending market.
Of course, alternative data cannot be a meaningful credit-building tool for SMBs if lenders aren't willing to embrace it. Lending to SMBs through alternative data can deliver two overarching benefits to lenders: expanding potential revenue and enhancing risk decisioning processes.
Additionally, alternative data is fueling the growth of nontraditional lending channels. In the peer-to-peer lending market, alternative data enables startup businesses with no credit history to obtain funding without seeking traditional loans in favor of peer-to-peer (P2P) options. One study from IndustryARC (via MarketWatch) noted that the P2P market could expand with a combined annual growth rate of 4.95% from 2019 to 2025. Leveraging alternative data can also improves a lender’s accuracy and reduces risk.
The Role Of KYB
The SMB lending process faces another challenge that alternative data can help overcome: know your business (KYB) regulations. They're officially named Customer Due Diligence rules and require certain financial institutions to verify not only the name of a customer or business, but also the identity of the person who controls the legal entity and anyone who owns 25% or more of the business.
Lenders rely on several avenues to meet KYB regulations, including records from the government, reports from credit bureaus and shareholder information that they obtain directly from the business. However, businesses that are just getting off the ground often lack significant credit history or annual reports. That’s where lenders can leverage alternative data (such as digital utility bills for address and volume verification) to supplement existing information.
Seizing The SMB Alternative Data Opportunity
It’s clear that if SMBs continue to leverage alternative data as a financial means for launching their businesses, a huge opportunity will emerge for lenders. To fully seize the opportunity, lenders should:
• Do their research. Several credit bureaus and companies, including Experian, LexisNexis and Dun & Bradstreet, are developing products that incorporate alternative data.
• Get permission. One way to access alternative data is by asking the customers themselves to provide it.
• Leverage electronic identity verification to automate the complex KYB process. Many companies, including mine, Trulioo, HelloSoda (an Urjanet customer) and LexisNexis offer identity and business verification.
Lenders have a plethora of options available to leverage more data in their decision-making processes; they simply need to get creative. By connecting their users' accounts to online marketplace accounts like Amazon or Etsy, or to financial statement accounts like Quicken, lenders can streamline the loan underwriting process and more confidently verify a business’s legitimacy and performance.
Ultimately, if lenders don’t embrace alternative data, they’re leaving money on the table and putting themselves at risk of losing market share to the competition. The lending community would be wise to start incorporating alternative data into their product and services portfolios – it simply makes sense to do so.
