In an extraordinary display of resiliency, small businesses in the U.S. are quite optimistic, despite all the turmoil of the last year. Even as small firms surveyed by PYMNTS last year revealed their struggles to survive into 2021, the latest data from the Commerce Department revealed a surge in new business applications in 2020 as entrepreneurs flock to emerging opportunities in digital-first business models and place their confidence in economic recovery.
Lenders are paying attention too. According to Ken So, founder and CEO of Tillful, a Flowcast company, optimism is on the rise. “We’re seeing broadly that the sentiment has been more positive on the business owner side as well as the lender side,” he told PYMNTS in a recent interview. “We are seeing lenders coming back, being more aggressive with their rates and approvals. It’s trending in the right direction.”
That’s good news, but any small business, new or growing, needs capital to survive. For the youngest companies, access to financing has always been difficult. Even as some lenders might be eager to back small to medium-sized businesses (SMBs), the newest of the pack might be left behind.
As So explained, that’s because these firms have little financial history from which to draw upon when a lender underwrites financing. Certain evolutions in the corporate finance space, however, have unlocked new opportunities to fill the credit gap for small firms.
An Alternative Credit Score
The business credit score is a critical tool for companies in need of financing. Much like a consumer credit score, its business counterpart can be a straightforward way for lenders to assess whether a company might be a proper fit within its loan portfolio and risk appetite.
Yet the traditional business credit scores, offered by the likes of Experian and Equifax, rely on legacy methods to assess the financial stability of a company, a strategy that unfortunately does not suit the smallest of businesses, according to So.
“They do scoring based on trade lines,” he explained. “These are vendor reported payment histories of their customers, and that can take months, if not years, to build up. If you’re a new business that’s only been around for six months or a year, you simply don’t have any credit history to establish a score with those traditional agencies.”
It’s only in the last five years or so that the business community has evolved to a point where there are now troves of rich, granular data that can be unlocked from a variety of sources — be it bank statements or Amazon transactions. That’s the information Tillful uses to create its proprietary business credit score, which takes advantage of this newfound ability to unlock vital data.
For small businesses, that can mean building up a credit history earlier and having access to financing that might not otherwise be available. For lenders, noted So, this can fast-track the application and approval process while also gaining access to a scoring system that continually monitors the financial health of a business.
Expanding Possibilities
The preapproval process isn’t solely about a business credit score, however. There are certain lenders that only finance firms in particular industries or with particular business models, for example.
Not every small business is the right fit for a lender, no matter how good their credit score is. Likewise, said So, not every financing product is the right fit for a small business, either.
Yet from merchant cash advances to factoring, there are plenty of solutions from which to choose. A company that needs to finance the procurement of new industry may not need the same type of financing as a firm in need of funds to back payroll. Education is a key component of connecting small firms to working capital to not only meet their financing needs but allow a company to use that financing in the right way.
“Many small business owners are not CFOs [chief financial officers] — they don’t spend 90 percent of their time on credit or business loans,” he noted. “There is a bit of education that needs to take place, to give them all of the pros and cons to make sure they understand their needs.”
The opportunities to finance — and the variety of financing solutions available — will only continue to grow as traditional lenders are met with competitive forces from alternative and FinTech players. The data that has been unlocked to lower barriers for the smallest firms to access capital is also now being used in new ways, said So.
For instance, eCommerce companies can use valuable insights from within their own ecosystems on platforms like Amazon and Shopify. The data within these portals can form an even more accurate credit profile specific to that business, industry, and other unique market conditions. Data, said So, will continue to be at the forefront of the industry’s effort to connect more small companies to the funds they need to drive economic recovery.
“That’s really what we’re trying to achieve — for people to unlock that data and make credit much more readily available for small businesses,” he said.
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