Published on August 26th, 2019 | by Guest0
Big Data and Small Business Lending: Current Applications and Future Trends
Small businesses are all over the place nowadays, and they make up a significant part of the US economy. But, with so many of them out there, it’s common to see a number of those businesses go belly up. And while each failed small business has its own unique story, the reasons why they have failed are somewhat similar. According to research, 30% of companies fail because they run out of money and because it’s hard for them to qualify for loans.
Another vital piece of information is the fact that 90% of all data has been created in the past two years. The internet has grown incredibly fast, and it’s not going to stop any time soon, which means there will be even more data, which makes stuff like big data absolutely essential in the future.
But what do big data and small business lending have in common? Well, small business lending has become a big data problem, as banks and lenders need all the help they can get in order to determine the creditworthiness of their borrowers.
With that in mind, let’s take a look at the current application of big data in small business lending and identify some future trends.
Current Trends in Big Data and Small Business Lending
One of the biggest issues small businesses face, especially during the first few years of operation, is insufficient cash flow. While companies can rely on different means here, such as accounts receivable financing or a line of credit, most of them pursue loans. Thanks to the emergence of big data in the lending industry, we now have the following trends:
1. Improved Underwriting
The reason why it’s so difficult for small businesses to get a loan is because banks and lenders used to look at just the applicant’s credit history. This means new small businesses didn’t really have a shot, but all of that changed in the past few years, thanks to big data. Lenders are now relying on thousands of data points, such as the applicant’s reputation in the industry, utility bills, income, and even their social media presence in order to determine whether they are eligible for a loan or not.
Banks, on the other hand, have still to catch up, although we can probably expect to see them picking up the model or partnering up with alternative lenders.
2. Faster Loan Approvals
Another downside of the loan approval process is its lengthiness, which can be a problem if your small business needs to act fast in order to plug a hole in its finances. Sometimes you can’t wait a few weeks in order to see if your loan will get approved. Big data can solve this issue, helping speed up the approval process, and in some cases, it can happen almost immediately. On top of that, it may even result in slightly lower interest rates than usual.
3. Reduced Paperwork
If you have ever taken out a loan, a line of credit, or a mortgage, then you have seen the extensive amount of paperwork that accompanies the process. Because big data takes into account thousands of different data points and bypasses the usual lending processes, it can result in much less paperwork. With the right big data tools, everything can be done in a digital format, which results in a speedier process.
What the Future Holds
While it’s hard to predict how big data will shape the small business lending industry because we never know how some new development might change things, it is safe to say that the following trends will emerge in the near future:
1. Customized Loans
Again, because of all the different data points available, banks and lenders will be able to gain better insight into their applicants’ financial ability, which would allow for new types of loans. With more alternative data available, lenders would be able to approve ventures which would have been deemed too risky in the past. They would be able to treat each applicant as a unique case, and they wouldn’t need massive resources for that because they would have big data, AI, and machine learning at their disposal. Their approval rate would grow, as would the number of clients, which means that pretty much everybody wins.
2. More Accurate Risk Assessments
As we’ve mentioned before, underwriters are already utilizing big data to analyze their clients and determine risk, and lenders will follow suit. Where there was limited information available, banks and lenders would come up with predictions that were pretty rough and subjective. With big data, they pretty much have all the information they need in order to determine the amount of risk for each particular loan, as well as how much money they can earn from them. In other words, deals that were previously considered risky might look more secure in light of new data points.
3. Different Supplies of Funding
Large banks will continue to run the lending show for the most part, but we will also see them copying alternative lenders in order to gather as much information as possible about applicants. Small businesses, on the other hand, will be able to tap into alternative means, such as peer-to-peer firms and asset managers, or even platforms such as Euronext which are interested in investing in small businesses. We will also see alternative lenders growing their credit volume. While this is good news for entrepreneurs, the pressure shifts to these lenders, who will be monitored and regulated more closely.
There is no doubt that big data is here to stay when it comes to small business lending. While that doesn’t mean that every business will get approved for a loan, the number of those that do get approved will increase, which will further encourage people to start their own businesses. In response, banks, lenders, and other institutions will base their lending programs on big data and its tools.
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