In less than a decade, alternative online lenders have created a whole new thriving industry by providing easy and accessible funding to small businesses and individuals. Much of their success – and growing popularity - is based on the fact that they provide highly flexible funds really fast to SMEs (including to ones with poor credit ratings). How do they do it? Well, it's all because of the data!
Alternative lenders (such as Cresthill Capital, which deals exclusively with small and mid-sized businesses) use a variety of data points to determine the risk attached to their clients. Using a mix of traditional credit data and alternative credit data gives online alt-lenders increased accuracy while assessing the creditworthiness of its clients. This, in turn, allows them to approve credit for companies deemed high-risk by banks and credit unions.
What type of data is used by alternative financing companies?
Usually, most banking institutions use financial information like credit score, internal bank records, and tradelines to determine whether or not to lend to individuals or businesses. Alternative lenders like Crest Hill Capital reviews applications with a wider variety of data. Along with the usual FICO score, they tap into financial information such as payment patterns for utilities or rentals, business transactional data, expense patterns, property records, and other publically available information to get a sense of the client’s reliability.
Some alt-lenders also use additional information such as social media feeds, address stability, subscriptions, tax records, and similar data to assess the risk of clients with very thin credit histories.
Most lenders ask customers to provide access to their account information and direct paperwork as proof; others use data aggregators for indirect information. But just collecting data is not enough! To get an accurate picture of a client's financial capabilities, this data must be analyzed – for this, alt-lenders leverage AI-backed fintech tools.
Time-wise, it is untenable for this data to be read and analyzed by individuals, but AL-enabled tools can crunch through these numbers almost in real-time - making the process super fast!
How does incorporating extended data help lenders and business owners?
When it comes to risk assessment, traditional financial data like credit scores, are more accurate than some alternative sources such as social media and expense patterns. However, while lending to new businesses or businesses with a poor credit history, these data touchpoints can be extremely helpful to arrive at the correct decision.
- integrated fintech allows lenders to process funding applications faster. In some cases, lenders such as Cresthill Capital review applications in less than 24 hours!
- alt-lenders can also use this data to serve clients with poor FICO scores or new businesses without established financial histories.
- access to data also allows them to be more flexible while dealing with individual clients. With an overview of the client's financial health, they can design specific funding deals to suit their needs.
The Bottom Line
The traditional banking sector is too narrow in its outlook and risk assessment approach. Additionally, they are also stymied by government regulations. Their risk-averse business model has an especially negative impact on the American small business community, which, as a result, was frozen out of the credit market altogether. Alternative data has made it possible for private lenders to offer this underserved community with funding at competitive rates while keeping their risk balanced. A win-win for both the lenders and for the businesses looking for credit.
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