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Uplinq: How Can We Use Alternative Data to Understand SMB Financial Performance?

Compared to their larger peers, SMBs often face difficulty securing financing. This long-standing pain-point is due in part to the traditional banks considering SMBs to be both high-risk and high cost to underwrite, onboard and serve. 

To compound the issue, credit reporting service providers rarely offer comprehensive coverage of SMBs. The problem is even more commonplace in emerging and evolving markets where unconventional business models are prevalent. 

Fortunately, a new wave of tech-first SMB lenders are now able to utilise alternative data points in a manner that can help to close this gap. These lenders can provide faster, easier, more transparent finance solutions, which are helping to transform the SMB finance ecosystem. 

Ron Benegbi, Founder and CEO, Uplinq Financial Technologies
Ron Benegbi, Founder and CEO, Uplinq Financial Technologies

Someone who knows a lot about this is Ron Benegbi, the Founder and CEO of Uplinq, his fifth start-up to date. Uplinq is a financial service platform that helps provide SMB’s with a reliable solution by utilising traditional data sources. As a 23-year senior technology executive, Ron explains how we can use macro data points to understand SMB financial performance

In the past, lenders only had limited data to work off when assessing whether to provide SMBs with finance. This data, which was mostly derived from a business’ accounting and banking records, or from credit scores only provided limited insight into the true financial performance of a company. In fact, the information would often provide a misleading picture and limit the ability for SMBs to get finance. 

Fortunately, alternative data is helping to modernise this antiquated process by sourcing additional financial information from multiple extra sources. With this information, lenders can build a more accurate depiction of a business’ overall position. In general, alternative data can be categorised into three broad groups:

External Market Attributes & Economic Indicators – Data taken from e.g., stock, currency, and real estate markets, GDP, the Consumer Price Index, and supply chains.

Demographic Data – Derived from e.g., population numbers, migration patterns, employment rates, lifestyle shifts, and education levels.

Exogenous Shocks – Data taken from e.g., COVID waves, interest rate changes, new regulations, political conflicts, and trade wars.

Additionally, raw data can be extracted from several sources to further bolster alternative data. These sources can include credit card and POS transactions, website and mobile device data, Internet of Things (IoT) sensors, product reviews, social media, utilities, traffic patterns, and even satellite imagery.

The importance of SMBs

It’s no overstatement to say that SMBs are the lifeblood of western economies. At the start of 2020 alone, there were 30 million SMBs operating in the US and nearly 31 million in the UK and EU, comprising 99% of all businesses. These businesses employ two thirds of all employees working in the private sector in the US, UK, and EU and generate around half of all business revenue.

Unfortunately, since the COVID-19 pandemic, many lenders have struggled to properly support SMBs. Notably, many lenders still use isolated macro data points to support the misplaced concern that lending to this type of business is too risky. However, as we will go on to explain later in this article, this approach is often flawed and could be stunting a much-needed recovery within the broader economy. 

Using alternative data to empower the underbanked and underserved

In order to set up a small business, individuals must first have a bank account and the ability to provide evidence of creditworthiness. As a result, groups of underbanked and underserved people are immediately excluded from the process. This problem is systematic and particularly affects migrant communities.

If change isn’t forthcoming, many ‘credit invisible’ individuals will continue to be unable to contribute to the economy in a meaningful manner, despite having the necessary qualities and skills to build and operate a successful small business. 

However, with access to alternative data, lenders can begin to make this much-needed change and start bridging the gap between the underbanked and underserved and the rest of the broader economy. Thankfully, there’s already evidence that its use is becoming normalised by credit lenders. 

According to a survey by TransUnion, 34% of US lenders are now using alternative data to evaluate both prime and nonprime borrowers. More promising still is the 66% of lenders who report that they’ve been able to lend to additional borrowers, as well as the nearly two-thirds of lenders who say they have already seen tangible benefits of using alternative data within the first year of adopting it.

Further progress will require the increased efforts of established lenders and credit bureaus, and the innovations of FinTechs. Should these efforts and innovations materialise, the outcome will likely be more favourable for everyone. In short, more equal access to credit for the unbanked and underserved will result in macro benefits for the global economy.

Using alternative data to enhance the norm

Through greater access to alternative data, tech-first lenders have more confidence providing capital to SMBs. In turn, more SMBs have been able to access the funds needed to power their growth ambitions. This trend has been noticeable since the 2008 economic crash, when more businesses started to secure funds through invoice finance and asset-based lending. 

However, a recent spike in lending to SMBs does seem linked to the growing number of lenders leveraging the power of alternative data. In the UK, two-thirds of financial services providers now use alternative data to improve their decision-making process, while in the US it is closer to 80%. By profiling SMBs more effectively, lenders can provide capital more flexibly and responsively. 

Ultimately, with alternative data feeding into and strengthening traditional data, lenders can provide capital with more confidence. In the wake of the COVID-19 pandemic, this benefit takes on a whole new importance and could help spearhead a more resilient economic recovery. 

Alternative data: the new normal?

With flexible lending arrangements – facilitated by alternative data – giving more SMBs access to working capital, the expectation is that recipient SMBs will gradually increase both their revenues and number of employees. As we move further away from the more disruptive effects of the pandemic, alternative data provides western economies with an opportunity to radically overhaul SMBs access to capital. In doing so, the shift can also provide a reliable and more accurate view of financial performance within resident countries and market segments.

Author

  • Polly is a journalist, content creator and general opinion holder from North Wales. She has written for a number of publications, usually hovering around the topics of fintech, tech, lifestyle and body positivity.

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