Why Lenders Should Stop Asking Small Businesses for 36 Months of Bank Statements

Small businesses are the backbone of the economy, providing jobs and driving innovation.

Hicham Oudghiri, CEO of Enigma Technologies, told Karen Webster, with a nod to the fact that the last few years have been anything but business as usual: “Small businesses tend to hold up in times like these particularly well.”

Inflation takes a toll — especially on end consumers. And per Enigma’s position in providing business intelligence and data cutting across various sectors, the consumer pullback is showing up in small and medium-sized business (SMB) results.

Card revenues are down for 62% of firms as measured in Q1 — and that’s a leading indicator for how the economy might fare overall through the rest of the year. The pressure to keep the lights on is mounting. Capital is expensive and lending is slowing.

In this environment, credit is a crucial lifeline for SMBs — for the smaller businesses that want to become larger firms, of course, and certainly for the Main Street shops that are looking to survive tumultuous times. But as Oudghiri noted, the traditional metrics used to underwrite loans are backward looking and don’t necessarily reflect the true creditworthiness of a firm. Lenders should focus on underwriting throughout the customer life cycle, monitoring and managing downside exposure, and understanding the economy as a whole when underwriting.

In terms of operating structures, smaller firms have relatively lighter loads of fixed costs than their larger brethren and can scale up or down depending on the broader macro environment.

With those dynamics in place, simply looking at an SMB with a “point in time” mentality won’t uncover the true state of affairs, said Oudghiri.

“Having a great underwriting program does not depend on that one way that you analyze bank statements,” he said, adding that a mix of data is needed — spanning real-time revenue data, open banking and permissioned data — to make informed lending decisions.

Oudghiri noted that Enigma’s data-driven health score takes into account a range of factors, including a small business’s customer loyalty and revenue profile. He told Webster these factors are crucial in identifying ideal small business clients for banks and software platforms. “What does the customer loyalty look like at a small business? Has their revenue been stable?” asked Oudghiri.

For the lenders themselves, there’s the ability to leverage that granular data into more efficient lending and outreach efforts — a key positive for many lenders who have only been through boom times and need to calibrate risk and marketing strategies.

Small business owners are often overlooked and under-resourced, making it difficult for them to pay attention to all the marketing messages that come their way. According to recent data, a large bank can spend up to $100 million on direct mail marketing alone in a year. However, a lot of this marketing goes to waste, as small business owners simply don’t have the time or inclination to sift through it all.

The lending community also lacks standard practices when it comes to small businesses, which means that small business owners may not know where to turn for funding, said Oudghiri, who stated, too, that among the biggest challenges in serving small businesses is the education curve when it comes to using alternative sources of data for decision-making.  

Not All Data Is Created Equal 

Oudghiri explained, “there’s a lot of data available, but not all of it is useful.” Companies that can tailor their marketing solutions to their small business community can build a lot of intellectual property in the process.

However, this requires dropping what he termed “instinctual beliefs” and experimenting with new approaches. Oudghiri adds that “the lenders, folks engaging with small businesses that are winning, have a very experimental approach toward what it is that they do.” By embracing skepticism and trying new things, lenders can incrementally build a performant conversion model for marketing and push spending toward the most effective channels.

Foot traffic data, while useful in the short term, may not be predictive long-term and can be seasonally influenced. The model that might have been 98% accurate in “normal” times may be only 60% to 70% accurate when inflation roars or exogenous events occur.

Looking ahead, he posited that watching the lending data coming out from regional banks will be a tell on how things are faring for smaller firms that are powering the economy.

By using data-driven analysis and targeting ideal small business clients, businesses can build stronger relationships with their clients and emerge stronger in the face of uncertainty.

“You’ve got to lean into what makes small businesses great,” maintained Oudghiri, “which is that they are small, they are community-oriented and they are extremely nimble. Customers are loyal and kind of married to the SMB, at least from a geographical standpoint.”