Why Visa Says It’s Time to Look Beyond the ‘Personal FICO’ to Underwrite Small Businesses’ Credit

Over the past few years, consumers have steadily returned to brick-and-mortar stores and spending seems resilient, albeit slowing a bit, even with inflation stubbornly in place.

But for the more than 33 million small businesses operating in the United States — employing nearly half of all U.S. workers — the cost of keeping staff in place is outpacing sales growth, as the job market remains hyper-competitive. Even though the price of fuel has backed off from recent highs, the cost of keeping fleets on the road and keeping the lights on is generally more expensive than has been in years.

For small businesses, access to credit — and especially business credit cards — provides a lifeline to help satisfy working capital needs. And as Matt Baker, head of small business at Visa, told Karen Webster, that access to credit is more critical than ever — even as these same owners are forecasting that they will see their own revenues rising by as much as 15% this year.

Beyond the Personal FICO Score

Time is of the essence, he said. The traditional processes wherein small businesses apply for credit, and the metrics by which financial institutions (FIs) gauge risk and make decisions are both time-consuming and less than efficient.

Many financial institutions are “relying on the older ways of underwriting — using the small business owner’s personal FICO score,” or perhaps, if there’s enough history in the mix, the business credit score. Only 50% of small business credit card issuers surveyed by Visa, he said, are using business credit scores in the underwriting process.

Relying on personal scores alone, he said, is limited in scope, where simple, consumer-based repayment history may not tell the whole story of a would-be borrower’s business creditworthiness.

There’s also the time spent waiting for a decision from their financial institution.

“What small business owners want is a fast ‘yes’ or a fast ‘no,’” he said, adding, “What they hate is a slow ‘maybe’ and then a ‘no.’”

Research conducted by Visa, he said, shows that most small business owners see a recession occurring sometime in the next quarter, with Visa’s Business Insights & Economics team suggesting this may happen later in 2023, presenting the potential for new small business challenges and opportunities.

This will put further pressure on small businesses as demand for their goods or services may soften. As a result, most firms are being careful about where they’re spending the cash they have on hand, he said — they may even be delaying some expenditures including higher ticket materials and capital equipment to ensure they have sufficient cash reserves to weather this possible economic slowdown.

Even though business owners are being judicious in managing day-to-day operations, rising inflation has led to some bifurcation: As of the first quarter of 2023, the majority of business owners think this year will be better than last, in terms of sales, as PYMNTS data show, yet only about 26% of small and medium-sized businesses (SMBs) have enough cash on hand to get them beyond the next two months.

There’s a growing movement by business lenders, including business credit card issuers, he said, to leverage alternative sources of information on the business, and, specifically, up-to-date information from business owners’ accounting systems to provide faster and more accurate credit decisions when issuing business cards.

For the financial institutions willing to tap into those data sources to do so, there’s a competitive advantage to be had: As Baker noted, 50% of small businesses would spend more with a higher credit limit. And they’re willing to vote with their feet, so to speak. Baker recounted surveys that show 30% of SMB owners said increased access to credit is why they switched financial institutions, and another 27% said that’s why they would switch in the next 12 months.

“This might translate into a lack of stickiness and retention that small business issuers may well see out there,” as time goes on, Baker said. There’s a growing landscape of providers, he told Webster, including firms like Ranqx and Uplinq, that harness real-time financial data from business cloud accounting systems and other relevant data sources, to streamline credit decisioning and add more precision to initial line assignments.

For the issuers seeking to provide their small business customers with the right solution, he said, a few “best practices” apply, which include automated credit decision-making, and extending additional credit line offerings at the same time. This could give SMBs extra financial firepower to negotiate with suppliers, expand their customer base and drive growth in a competitive, ever-evolving market place. There’s also an inherent advantage in FIs’ examining their SMB portfolios and increasing credit lines proactively when warranted.

“This keeps the SMB owner from thinking, ‘I’m not going to get an increase in the credit line from my primary FI, so I’m going to look elsewhere.’”

Looking ahead, he said, a fully digital, automated continuum of loan decisioning and origination informed by real-time data on the business entity and business credit scores — with constant monitoring to adjust lines as needed — can help provide capital to the most fledgling of firms, the startups that ultimately prove to be Main Street mainstays, as well as existing, vibrant businesses.

As Baker noted, “Small businesses are the lifeblood of the economy … and access to credit is the lifeblood for small businesses. When small businesses thrive, communities thrive and supporting FI’s grow.”