There is no doubt that small businesses act as the foundation for the entire U.S. economy, and nearly half of the entire private workforce is made up of small businesses. Despite the large portion of the economy that constitutes these businesses, they have been classically ignored when it comes to commercial lending practices. This is primarily due to the fact that lending systems weren’t modernized until fairly late in the game, and even now there are still issues that could be resolved with the proper tools.
The First Step Toward Modernization
A digital commercial lending infrastructure was created in 1970 by the Fair Credit Reporting Act, which focused on using large amounts of data to promote the advancement of the financial industry. By adding transparency to the process and defining the rights of all consumers, the FCRA sought to balance the system such that all businesses would have equal access to commercial funding.
Once the FCRA was put into action, the regulations that it included allowed for a number of new and helpful financial products to enter the market. It was at this time that the idea of a credit score was introduced, which is nothing more than a measurement of an individual’s ability to handle credit. Credit scores are often used to determine if someone is eligible for a credit card or bank loan. Unfortunately, an unforeseen side-effect of instituting the credit score system was that investors could use the score to judge the potential success of businesses and individuals who run them.
An Incomplete System
It has been estimated that roughly 67 percent of all American businesses do not have the financing they require. Much of this is due to the new regulations that were put into action after the collapse of the housing market in 2008, and they were designed to make sure another such bubble never formed again. Banks were no longer able to make loans that were considered too risky, and even small community banks were forced to put more stock in the personal profile of a commercial borrower.
Another aspect of the commercial lending industry that is often overlooked is the payday loan market. While these loans are a bit easier to procure, they still became harder to receive after the changes to the market in 2008, despite the fact that such loans are the only method of procuring emergency funds for many Americans.
The Efficacy of Big Data
Most commercial lenders will ask for two simple pieces of information to begin the loan process. They’ll want to know the current income and credit score of the applicant, which is exactly what they would want to see from those trying to procure a personal loan. That means that, historically, small business owners have been at a disadvantage due to the way banks assess risk.
Commercial lending practices have evolved quite a bit since the earliest days of digitalization, and while the process is more streamlined in many areas, it is also much more complicated in other areas. Underwriting is one area that has seen a substantial amount of change with the advent of technology, but that is just one aspect of how Big Data can improve the lending process.
Big Data technologies have provided another step forward in the effort to modernize the commercial lending industry. These technologies provide a much broader sense of borrowers, their business goals, and both the potential and current value of their business. Borrowers themselves are also able to easily see what sort of terms their competitors are receiving, which will give them an edge in terms of negotiations. In other words, Big Data allows commercial lenders to get a better sense of the borrower from an individualistic point of view. This will help small businesses procure commercial loans since the loan won’t be dependent on their personal credit score and finances.
