Are You A Data-Enabled Lender?

We’ve all heard the expression, “Data is King.” To make effective decisions of any kind requires acquiring and analyzing data, and we can all agree that this is especially true for financial institutions.

Yet, for decades, many have based small-business lending decisions on outdated data points such as FICO scores or tax returns. Even worse, that information is skewed and often inconsistent with the health and viability of the business.

Without the proper data, small business (SMB) loan decisioning is placed at a serious disadvantage.

Here’s why:

Before the Great Recession of 2008, banks around the country relied heavily on FICO scores and tax returns to make quick decisions on millions of uncollateralized small business loans. They were making decisions based on unreliable, outdated information – and the result was disastrous. Nearly 3,000 banks closed their doors and the impact was felt by everyone – consumers, businesses, banks, etc. – for nearly a decade.

So why did investors allow financial institutions to assume so much risk?

The loan application process can be long and arduous, especially when lending to small businesses. For many banks, gathering and inputting financials was so time-consuming, they consciously made decisions based on partial or outdated information in an effort to speed the process. A great customer experience is important, but it is critical that lenders make lending decisions based on accurate, reliable information. If they had, lenders would have seen where the real risk was in each loan. Instead, they took on huge risks and failed.

Banks must reconsider their over reliance on tax returns and FICO scores. These grossly outdated methods provide an inaccurate picture, resulting in inefficient processes, increased risk and the threat of losing clients to alternative lenders.

To more accurately evaluate the health and risk of a small business, lenders must consider many data points instead of a single credit score or outdated information contained in a tax return. Moreover, lenders need data that can be accessed quickly and easily, without excessive paperwork, red tape or cost. Today is all about the need for speed, but that doesn’t mean you should sacrifice quality data.

The solution is financial data sharing technology. To remain competitive, banks must review existing processes and implement technologies to drive efficiency, reduce risk and provide a better customer experience.

In our latest whitepaper, we offer insights on how financial institutions can transform their SMB lending processes, explore how outdated SMB borrower data leads to inefficient processes and puts the lender at greater risk, and discuss ways to drive efficiency, minimize risk and gain a comprehensive understanding of your SMB clients.

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