Personal Data’s Place In Small Biz Underwriting

Gone are the days of straightforward credit risk assessments. With Big Data and analytics technology taking a front seat in this industry, the methodology behind assessing a small business’ creditworthiness is multifaceted — and evolving.

Experian knows this well. The business information services provider launched its Small Business Credit Share (SBCS) program nearly a decade ago, and the company is still molding the solution in an effort to refine how to most adequately assess SMEs’ credit risk.

In its latest change, announced late last month, the SBCS program now includes new scoring models and features. In an interview with PYMNTS, Dan Meder, Experian’s vice president of product development for Experian’s Business Information Services, explained how these new features work and why attaining a strong credit score as a small business owner means balancing the impact of personal finances with professional.

For instance, among Experian’s added features in the SBCS program is the inclusion of personal finance behavior in an overall assessment.

“A small business owner is very often paying bills as they would a consumer, so that additional consumer data adds some depth to the score,” Meder said.

[bctt tweet=”‘A small business owner is very often paying bills as they would a consumer.'”]

But while personal payment behavior can indicate how a small business owner will handle a company’s finances, the two cannot be interchangeable, Meder added.

One of the biggest challenges for small businesses when seeking a loan or financing is their lack of credit history. Meder said that if an entrepreneur wants to establish good credit, they must first start spending like a business — not like a consumer.

“With a small business, one area you might start looking at is: Are you using your personal card to buy things for your business?” the executive explained. “You want to start to establish your business credit using a business card to buy inventory, or the like, rather than using your personal credit. Whatever means you can to establish yourself as a business, rather than trading on personal assets, is probably a good first step.”

Expanding The Scope Of Data

Experian added other features to its SBCS program as well, including capabilities for lenders and trade credit providers to examine a business’ past performance. “We’ve also focused a lot on historical trends, as opposed to just what the current state of the business is,” said Meder. “We started looking at what direction the business is going in in terms of payment behavior.”

Examining a business’ historical data means including a far greater number of data points in an overall assessment. An increase in volume of data used to assess corporate creditworthiness is just one of the knock-on effects of the rise of Big Data and analytics technology development, and for some credit assessors, Big Data provides a massive pool of information from which to choose data points.

For instance, some credit assessors are experimenting with alternative data — information sourced from a business owner’s social media profiles, for example — to include with traditional statistics, like repayment history, for an overall credit assessment.

Meder said that Experian certainly has this trend on its radar, but it’s unclear how alternative data will ultimately impact the credit underwriting process.

“We’re experimenting and doing some work ourselves in looking at that type of data,” he said of the use of this kind of information in assessments. “We haven’t put it in a product yet, and, quite honestly, we haven’t taken a formal stance yet on how much value we see in it.”

Factors like compliance will have to come into play as Experian and other assessors consider alternative data in their process, and this type of information will have to prove predictive if it is to remain a sustainable part of the underwriting process.

Still, Meder said, there is evidence that alternative data sources, like social media platforms, can prove useful; it’s simply a matter of time for the market to weed the bad data out from the good. Until then, he agreed, there can often be simply too much data in the credit risk assessment process.

“Is there a potential for overload? I think the answer is yes,” he said. “It’s going to take time, I think, to sort through what the most predictive attributes are versus those that aren’t predictive.”

As Experian takes a wait-and-see approach on how Big Data and analytics technology will filter into the credit assessment market, Meder said the company is focusing on the information already proven to indicate creditworthiness, like personal payment behavior and past business performance.

And as the firm continues to mold the SBCS program by adding in proven sources of data, Meder added that while trade credit providers and lenders will naturally benefit from reduced risk and a more reliable method of underwriting, the endgame is all about the small business. “It’s really built for the folks that provide the services and financing, but because a better credit profile is available on a small business, the owner actually benefits as well,” Meder explained. “It gives a better credit profile and, therefore, better access to credit.”