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Feb 2022 | Credit Decisions | Commercial Risk

You can’t lend to businesses you can’t see

This is a problem for lenders and brokers – as well as for new UK small and medium enterprises looking for funding.
1.6 million of those recently formed businesses are effectively missing from lenders’ radars (Experian data). It takes up to 20 months for a new business to file the accounts that inform commercial credit scores

Until then, many find it extremely difficult to obtain loans; using personal funding instead to keep their businesses running or even risking personal security to secure finance.

According to the All Parliamentary Group on Fair Business Banking, this problem is now “acute”.

This isn’t just a challenge for firms borrowing to grow. A lack of robust, standardised data on these businesses results in lengthy underwriting processes that slash profit margins, delay desired funds and fail to fulfil the FCAs objective of fair and equal treatment for SMEs.

The good news for lenders is that it’s now possible to lend to early-stage businesses with greater certainty about their viability than ever before by using Open Banking.

Reaching the invisibles: good business for lenders

By unlocking credit opportunities for early-stage businesses, there are two big benefits for lenders:

  • More lending with managed risk: Lenders can secure profitable new business with up-and-coming customers. A study cited by UK Finance estimates that 70,000 creditworthy firms a year are either declined for credit or discouraged from applying, amounting to around £2 billion of credit. Many of these are early-stage invisibles.
  • Clearly and robustly meeting FCA expectations: The regulator is watching lenders when it comes to SME credit. The Bank of England estimates that the gap between the credit SMEs need and what is available amounts to £22bn. In response, the FCA has made clear that it expects lenders to take steps to avoid “a repeat of the well documented historic issues in the treatment of SMEs”. Finding a way of lending responsibly to invisibles is critical here.

Commercial Acumen: See the viability of new businesses, instantly

Experian’s Commercial Acumen service helps lenders finance more viable SMEs than ever before, even those with limited levels of financial data lodged with traditional sources.

Using surrogate financials and reliable KPIs it makes the invisibles visible. It gives lenders new opportunities to judge viability, supporting responsible lending decisions with auto-categorised current-account data shared via Open Banking.

Commercial Acumen lets lenders:

  • Lend to firms without filed financial accounts: Surrogate financials include operating costs and revenues, the costs of any existing financing, overdraft usage, warning transactions (such as gambling), as well as trends over time.
  • Provide faster decisions: A recent EY survey suggested that 55% of SMEs want to be funded within seven days. Using Commercial Acumen, funds are typically released in 24 to 48 hours.
  • Decide based on the latest facts – not those from a year ago: Commercial Acumen provides a real-time overview.
  • Simplify applications: The process takes the applicant under 10 minutes.

With 82% of businesses now open to sharing Open Banking data, innovative SME lenders can today see a whole landscape of excellent new potential lending opportunities for the first time.