Over the past several years – more or less since the recession hit – many small business owners have reported varying degrees of difficulty in obtaining credit to expand their companies from financial institutions. And while that problem has started to smooth itself out more recently, it still remains an issue for many firms. Now, experts say that there may be ways for lenders to re-enter that market with greater assurance of a return on their investment.
Many of the ways in which lenders consider the viability of a small business loan application might not be as predictive as they may believe, according to new data from the Harvard Business Review. It seems that when considering many data points to determine a company’s eligibility, the most predictive information available is not a credit score or data compiled by the ratings bureaus, but something as simple as a firm’s cash flow. This is something that banks tend to use very rarely when considering an application, but which provides far more assurance of making the right call in terms of credit risk than, say, a credit rating or demographic examinations of a company’s area and other details.
What’s not as predictive?
Of course, that isn’t to say that credit rating data doesn’t say a lot about a company or its owner – of the four major considerations used by both traditional and alternative lenders, it still ranks No. 2, the report said. However, that kind of “firmographic” detail such as company size, industry, geography, customer base, and even an owner’s education level can fall short when it comes to determining the risk associated with any given small business.
Most problematically, though, is that some alternative lenders even consider a company’s details as they relate to social media, the report said. That can include looking at reviews on sites like Yelp, check-ins through Foursquare or Facebook, and interactions on Twitter. In general – and this may simply stand as self-evident to many owners – that kind of information is not very reliable when it comes to determining if a company is creditworthy.
Before applying for this type of financing, owners might want to consider what they can do to make themselves more attractive. That could include taking the time to find more affordable small business insurance policies, such as errors and omissions insurance, to keep costs down and perhaps devote more money to improving other aspects of the firm on an ongoing basis.