Believe it or not small businesses are getting funding these days. The question is where are they getting funding? The big banks are not lending to the average small business. Unless you have a rock solid balance sheet, consistent cash flow from a diverse customer base, and a stellar personal financial statement with a high credit score, you are unlikely to secure a loan from a traditional bank. But it is not all bad news. There are many new alternative small business lenders that are exchanging the customer relationship manager for a computer engineer. These lenders are utilizing new data sources to determine the creditworthiness of a small business. Here are 3 types of data that lenders are using to help make credit decisions.
1. PayPal and Bank Account Data – Your traditional banker may ask to look at your bank statements simply to verify that your balance and account activity is at the level you claim it is, but innovators like OnDeck Capital are carefully analyzing your PayPal and bank account data to determine your creditworthiness. Your PayPal account can be rich with important data that a lender will want to know. For example, your PayPal account can demonstrate if you have a diverse customer base or if you rely heavily on one customer. It can show whether your business has consistent sales, or if sales fluctuate seasonally. It can also show how often and which times of the month your balance tends to dip lower. All of this data will help the lender understand if it makes sense to extend credit.
2. Social Media Data – Similarly alternative lenders like Kabbage are digging into your social media data in order to get a feel for the creditworthiness of your company. Kabbage will allow loan applicants to connect their Facebook and Twitter accounts to their loan app. Based on data points like number of followers, engagement rates, etc a potential lender can determine whether you have a broad and loyal customer base. Investors believe this method is worthwhile considering Kabbage has raised $56 million in equity financing since inception.
3. Shipping Data – Finally, alternative lenders like Kabbage and OnDeck are using shipping data from UPS to quickly determine things like where are your customers, how many customers do you have, how often do your customers repurchase, are you expanding your geographic reach, etc. This is all data that the big banks probably are not collecting because they do not have the systems in place to analyze the data. Alternative lenders are going to be able to determine which data points are important to focus on and quickly adapt their systems while the traditional banks are going to move like the big slow giants that they are.
The good news for small businesses is that the credit score is not the only data point that matters anymore. This doesn’t mean you can ignore your credit score, but it does mean that you can still grow a business even if your credit history isn’t stellar. If you excel in any or all of these 3 data points, then it may be time to look into alternative financing for your small business.