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Big Data Provides Big Advantages in Small Business Lending
Posted By Rohit Arora On August 9, 2012 @ 11:00 am In Economy | No Comments
Increasingly, the power of data is impacting the small business lending marketplace by enabling banks and others providing funding to make more detailed risk assessments of potential borrowers.
Advances in technology and the accessibility of big data enabled underwriters to:
• Spread risk more widely across geography and industries.
• Lower acquisition costs while expanding geographic footprints.
• Reduce the need to open new bank branches.
• Offer paperless loan applications, refine underwriting, and speed up the lending process.
• Develop targeted financial products geared for startup businesses, which have experienced difficulty in securing capital from big banks.
• Lower significantly the cost of capital, particularly from alternative lending sources.
Since the credit crunch began, small companies — particularly businesses that have been operating for less than two years — have often been denied loans by traditional banks. Use of technology provides lenders with more robust information about borrowers and enables them to offer products specifically targeted to the needs of startups.
Because of this, people with credit scores as low as 535 can secure funding, in part because lenders are able to access robust information about their credit history, industry, and even the economic status of the area in which they live.
Today, financial institutions can analyze primary data, such as loan application documents, and information from credit ratings agencies such as Equifax and D&B. Since financial data is so detailed today, lenders can develop financial products especially for startups.
I am seeing this more and more among non-bank lenders, which have become increasingly important in small business finance since 2008 when credit markets tightened.
The so-called “alternative lenders” approve more than 60 percent of funding requests, according to the most recent Biz2Credit Small Business Lending Index. Perhaps the most encouraging aspect of the integration of technology in small business lending is that it has made it easier for women-owned and minority-owned companies in economically disadvantaged areas to secure capital.
As financial institutions streamline the credit decision-making process, they save entrepreneurs time and frustration that they otherwise might encounter in seeking funding to start and expand their operations. Technology truly is revolutionizing small business finance in the same way that online shopping forever changed retail.
Loan Approval  Photo via Shutterstock
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 Loan Approval: http://www.shutterstock.com/pic-97756691/stock-photo-magnifying-glass-and-approved-credit-application-form.html