Over the last few years, millions of small business owners across the country have probably found that while they’re on better financial ground and the broader economy is steadily improving, access to credit has continued to remain at extremely low levels. That can make it more difficult for such companies to succeed as well as restrain larger economic growth, and as such, many both in and out of the lending industry are working to unlock this puzzle.
The problem for many small businesses is that, as far as lenders are concerned, they still pose a significant risk in terms of delinquency and default, and that doesn’t outweigh the relatively small margins on which these loans usually operate, according to a report from the Fair Isaac Corp., the company that pioneered credit scoring. Typically, the financial return that lenders see on small business loans is relatively small – due to the fact that they tend not to borrow much money in the first place, relatively speaking – so opening themselves up to additional risk is not an appetizing consideration for many.
Moreover, this can be a potential problem for small business lending specifically because, unlike individuals or larger companies, these independent firms typically don’t have nearly as much financial history data upon which lenders can fall back, the report said. That is to say: With people and big businesses, lenders know what they’re getting, more or less, in terms of risk. Smaller companies do not fit that bill for the most part.
What can be done?
Banks that want to expand their small business lending might couple perhaps consider the benefits of trying to automate the approval process, using as much data from a number of different sources as possible, the report said. This is why the U.S. has recently seen a significant increase in the number of alternative small business lenders – many of which are finding success – because they’re typically using far more data than traditional banks to weigh credit risk.
This is something that entrepreneurs must consider as well: What can they do to make themselves more attractive to lenders? Indeed, having the ability to cut costs, such as by finding more affordable small business insurance policies (including those for liability insurance), could go a long way toward creating a more solid financial foundation.