How Can Alternative Data Help Both Lenders And SMEs
Small and medium-sized businesses play a vital role in facilitating economic development, employing a vast number of people, and helping to shape innovation.
Yet, SMEs face a lot of challenges when trying to access adequate funds to successfully finance their operation and growth. Small and medium-sized business owners often fail to get a business loan because of endless documentation, collateral requirements, and the complicated loan approval process.
On the lending side, traditional banks and other financial institutions consider SMEs high-risk borrowers due to limited or no financial data available to access the financial health of these businesses.
This is where alternative data comes into play.
How lenders can leverage alternative data in the small business funding sector? How can it help SMEs to get funds faster and easier? Keep reading while we’re sharing how alternative data can support both lenders and SMEs.
Alternative Data and Lenders
When it comes to providing funds to small and medium-sized businesses, it is extremely challenging for lenders to determine a borrower’s creditworthiness. Since most SMEs need access to funds to successfully run and grow their businesses, but while their venture is new or still emerging, they have no or limited record of positive credit history, and which is one of the most important factors that lenders consider when reviewing and approving a loan application.
Lenders can collect and analyze alternative data on creditworthiness based on information readily available in the digitized form such as online rankings, utilities, and mobile phone data, social media and internet data, and more.
While traditional data such as credit score, business history, cash flow, profit and loss, sales, and bank accounts have its advantages, alternative data can help lenders accurately predict the future of financial health of an SME, faster.
Alternative Data and SMEs
While analyzing SMEs ‘ financial data was difficult in the past, today digitized finance that utilizes alternative data is offering another chance to address obscured credit and financial histories of SMEs.
Every time when SMEs and their clients make utility payments, use mobile phones, conduct banking transactions, pay taxes, browse social media and internet, send emails, texts, messaging files, and images, buy or sell electronically, get customer reviews and ratings, or manage their payables and receivables, they leave behind a variety of their own, real-time and verified data that lenders can use for credit decisions.
Alternative data helps SMEs to build a strong credit profile and eventually get easy funding when they need extra working capital to get their business off the ground. Moreover, alternative data helps startup businesses or SMEs with no or limited credit history to obtain funding.
Today, many fintech companies are creating lending APIs that lenders can use to access various financial, accounting, banking, cash flow predictive data, and alternative data. In the future, this data and information will help SMEs to obtain fast and easy funding and lenders to better determine the borrowers’ creditworthiness, offer the right loan products, and make informed lending decisions.