For banks, serving Main Street businesses has historically been difficult — and it largely comes down to a simple issue of time and cost. Underwriting any business is labor-intensive and costly. So, the amount of time and effort banks are willing to invest in deciding whether to grant a $50,000 loan for a small business with $500,000 a year in annual revenue is going to be a fraction of the time they will put into making a decision about a $1 million loan for a business doing $10 million a year in revenue.
The lack of a cost-effective infrastructure to efficiently analyze small businesses has forced banks to rely on an inaccurate shortcut: The personal credit score of the owner. It is a fast and inexpensive way to make a judgment. However, it reflects the personal payment history of an individual, not the current financial state of the business. While this piece of data is easy to procure, it is a highly inaccurate indicator of creditworthiness.
The problem in relying on the personal credit score becomes especially pronounced because many small business owners use personal credit to initially build their businesses, which creates a roadblock to accessing capital once they’ve become more established.
For example, a profitable auto repair shop owner that used personal credit to purchase inventory might see his personal credit score decline because he has a higher debt utilization. This in turn causes him to be denied a loan from his bank for a reason that has nothing to do with the health of his business. This scenario often leaves millions of businesses unable to access capital — not because they aren’t creditworthy, but because there is no efficient way for the bank to see that they are creditworthy.
And it isn’t just inefficient for lenders; it’s also time consuming for the business owners themselves. Completing lengthy loan packages from traditional lenders is a labor intensive process, requires detailed paperwork and can take weeks before they receive a decision, let alone capital. Small business owners typically wear many hats at their business and are extremely busy — they often lack the time and resources required to provide a detailed business plan, financial projections, tax returns, etc.
While technology has changed everything in the small business owner’s life, from the accounting software they use to how they acquire new customers, the lending space has been slow to adapt new methods to improve service and turnaround time. However, recent innovations in technology are starting to emerge to make capital more available to small businesses.
Lenders now have access to new technology that can look beyond the credit score and quickly and efficiently analyze the true financial health of a business. At On Deck, we aggregate electronic data from online banking, merchant processing, accounting software and social media to create a highly accurate profile of the financial health of the business. Our technology has delivered over $200 million to Main Street businesses, and can make loans entirely online within 24 hours.
And for the borrower, technology is replacing those lengthy loan packages with more efficient systems. Websites like Lendio and Biz2Credit allow business owners to put their information in front of dozens of lenders at a time. Social lending sites such as Lending Cluband Prosper allow business owners to quickly access loans of up to $35,000 online, but do rely more extensively on the personal credit score. By applying technology, what used to take months is now being accomplished in weeks.
For millions of small businesses in the United States, growth is directly tied to their ability to access capital. These businesses can only expand, hire and meet their potential when our lending system works efficiently. With technology’s increased presence within the lending landscape, both small business and lenders are poised to benefit.
Brad Kime is president of On Deck Capital.
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