Better Data Can Help Financial Institutions Lend to More of the 30 Million Small and Medium-Sized Businesses in the United States
LexisNexis Risk Solutions released the results of its 2019 Small and Mid-Sized Business (SMB) Financial Inclusion Report, which measures the degree SMBs experience challenges when seeking financial support from banks and lenders. Based on a survey of 305 owners and authorized agents of SMBs (businesses with up to $20 million in annual revenue) who have applied for funding in the past three years or intend to apply in the next three years, the findings revealed that smaller SMBs are at increased risk of experiencing financial exclusion, compared to their larger peers.
SMBs are drivers of job growth for the economy with new businesses launching daily. In order to start up and thrive, these businesses need access to capital for growth. However, due to a lack of information caused by short/scant commercial credit histories, bad personal credit or unwillingness on the part of owners to provide personal financial information, financial institutions can be hesitant to lend to SMBs.
“There is great opportunity for financial institutions to extend credit to a larger share of the more than 30 million SMBs in the United States, but these institutions need access to richer data that can help evaluate creditworthiness in a way that does not add risk to their lending portfolios,” said Ben Cutler, vice president, business risk and specialty markets, LexisNexis Risk Solutions. “Many SMBs want or need credit but believe they will be denied. Financial institutions run the risk of excluding a sizeable number of potential and loyal customers by not properly educating them on and providing options for funding.”
The smallest SMBs, with under $100,000 in annual revenues, are less likely to 1) have a good understanding of the financing available; 2) believe they have sufficient access to credit; and 3) have applied for funding in the past three years. While they want credit, they believe they will be denied due to a lack of a lengthy commercial credit history. Additionally, some SMB owners have bad personal credit and assume this disqualifies them from accessing credit for their small business. However, data shows that 66% of SMBs earning less than $500,000 indicated they would be loyal to a lender that approves them for funding.
While many small SMBs are eager to apply for funding, they are generally less willing to provide personal financial statements or personal guarantees in order to secure that funding. They are also less likely to have a good understanding of the financing options available to them, which can further exclude them from accessing the funding they need. By educating SMBs on their financing options and using enhanced sources of data in their lending evaluation process, financial institutions can make more informed decisions, which can help win long-term customers they might have otherwise turned away.