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From financial strain to finding ways to achieve sustained growth, starting and running a small or medium-sized enterprise, or SME, can be a gruelling undertaking. Many experience issues with cash flow due to unpaid invoices or slow business when starting out, and when capital is limited, investing in the necessities required to take the business to the next stage is near-impossible. Due to this, many SMEs turn to lenders to secure extra capital. Unfortunately, close to 40 per cent, or one in three, of all SME loans are denied.
Among the reasons for this high rate of denials is a lack of relevant data that financial institutions use to assess whether a loan is high-risk or viable. As standard, lenders usually request bank statements and financial statements, like a profit and loss and balance sheet, but data on critical business aspects like daily sales, POS transactions, and recurring subscriptions all help them build a more complete picture of your business. The more data the lender has available to prove willingness and ability to repay a loan, the more likely the application is to be approved.
As such, understanding the data lenders need to assess a loan can help SMEs to secure the capital needed to grow their smaller business into a large one.
Some lenders will ask for you to email (or worst case, fax or mail hard copies) of this information to them so they can assess your financial standing. For SMEs using more digital savvy providers, providing your information might be as simple as a few clicks through SME data platforms like Codat that share and sync financials with service providers.
To help you on your way, we’ve pulled together four key data sources financial institutions can use to accurately assess your risk profile, so you can understand which alternative sources of data you may want to give some TLC.
Supplier Payment History
A large part of the underwriting process is about assessing how likely a business is to repay the loan offered by the lender. As such, the ability to demonstrate a strong history of timely repayment of credit is vital to the overall success of an application. Supplier payments are the ideal source for this, as generally paid on 30-day terms, therefore each bill paid on time is a positive indicator for willingness to repay credit.
For the uninitiated, customer concentration refers to the way in which a businesses’ revenue is spread across their client base and can be calculated by analysing customer invoices recorded in your accounting software. When the majority of revenue for a business comes from just one or two customers, lenders consider this to be a higher risk because if that customer should go bust, the business may no longer be viable. On the other hand, showing that customer risk is spread across a greater number of clients can act in your favour when applying for a loan.
While traditional financial institutions typically want to see a range of account statements and activity, POS data, such as that gained through a payments terminal, helps to verify a businesses’ activity. This is particularly useful to lenders if the data can be accessed live, directly from the source. Live sales data gives lenders a more up to date view of revenue than your financial statements and since the data is hard to tamper with, it is seen as a trust-worthy source of information. Sales data provides insight to lenders around trends within the business — if there are routine quiet periods within certain timeframes, or a high rate of chargebacks for returned product, for example — that may impact an SMEs ability to repay their loan.
From beauty boxes to automated recurring pet food orders, many businesses run on a subscription basis. This is advantageous for businesses, who can not only rely on a base amount of income each month, but also leverage this aspect of their business to prove business stability to lenders. Lately, a number of new financial products have come to market from providers like Crowdz and Capchase which work on the basis of advancing the total annual revenue that is due to be paid by customers on a monthly basis. It’s seen as lower risk for the lender because your customers have already committed to paying that revenue. Trusted data on recurring revenues is critical for these products.
Although the process of getting a loan can be intimidating for even the most determined SME, there are ways to strengthen loan applications through the use of varied business data. Business aspects like recurring subscriptions, insights into customer concentration, supplier payment history, and data from interconnected systems including POS all help to paint a holistic picture of a business, enabling lenders to make more informed decisions based on qualitative and quantitative data, ultimately enabling better access to financing for SMEs.