Lending to small businesses makes up a huge part of the business lending industry. But the banks have become more squeamish about lending to them because they’re scared they won’t have the ability to pay the money back. With nine out of ten small businesses failing to make it beyond five years, this is a real threat.
According to the CEO of LuxVacation, "The problem for entrepreneurs is they’re all being hit with the same idea in mind. Even if you’re one of the few small businesses with a viable plan, the chances are traditional lending institutions aren’t going to give you the benefit of the doubt."
But big data is making it easier for lenders to figure out who to lend with, and it could make this business profitable. This article is going to discuss how big data could change this industry for the better.
What Is the Role of Big Data in Small Business Lending?
The rise of big data has touched every industry in some way. Gathering large amounts of data is easier and cheaper than ever before. The fact is that any lender that has been in business for just a few months can build up a useful idea of the type of lender that comes to them and their likelihood of being able to pay back.
Lenders are able to build up an idea of their ideal borrower. They can compare this with the data they’re getting back from the people they’re lending to in order to figure out whether they’re lending to the right people.
Credit scores are just one way of figuring out who’s a worthwhile candidate, but big data digs deeper than that.
Who’s Going to Default?
Whenever someone decides to apply for a logbook loan or a long-term business loan the lender has just one thing on their mind. Are they going to be able to make the repayments? Are they going to default on the loan at any point? It’s a risk every lender takes.
Previously, it was all about gut feeling. The lender met the applicant in person and talked to them about their companies. If they felt that they were trustworthy and they would be able to pay the money back, they would authorize the loan. The problem is you can’t realistically do this with any degree of accuracy.
Big data is making it easier because you can use your previously successful relationships to analyze new applicants. The data you’ve gathered from companies who paid back their loans can be taken advantage of.
Why Is It More Powerful Than a Credit Score?
Lenders often go to the default method of simply looking up the person’s credit score. This is deeply flawed, though. New businesses have no long-term credit history. You could use the applicant’s personal credit score, but that’s no indication of their ability to run a business that can meet its debt obligations.
Big data studies trends related to everything, including the type of business, the number of people, the business’s previous performance, and more. It uses the behavior of the business and its leaders in an attempt to understand whether someone can pay back their loans.
Will It Make the Small Business Lending Industry More Profitable?
Big data, when used correctly, has the capacity to help lenders make informed choices as to who’s a trustworthy borrower. The number of defaults will decrease because businesses have the data at their disposal to make better decisions. Crucially, small business loans should increase because lenders no longer have to be overly conservative.
Even the big banks, if they use big data, will increase the number of loans they make because they’re not just using a single number on a screen to determine who’s suitable.
Over time lending to small businesses will become far more profitable. And it’s not going to center on the number of businesses that collapse. It’s better for everyone because even entrepreneurs will have a better chance of obtaining these loans.
Big data has a big role to play in the small business lending industry. When used correctly, it has the potential to increase your profits.
What role do you think big data is set to play in this growing industry?