For lenders, data is one of the most important factors in creating products to meet the needs of small and medium-sized enterprises (SMEs).
While large companies have audited financial statements, proven revenue streams, or large amounts of assets on their books to prove their financial viability, many SMEs seeking loans don’t have the same base. So while traditional lending metrics (like credit score) can work well for larger companies or more established people looking for financing, for small businesses, lack of financial data is a major barrier to success. obtaining a loan.
SMEs are not a bad investment: For many lenders, the right investment in SMEs can generate high returns, and the loan market is growing. Given that the number of unbanked or underbanked people in the United States is approximately 60 million – roughly the same size as Generation X – the small business loan market has plenty of room to grow, and traditional and non-traditional lenders are in a privileged position. to enjoy. SMBs that rely on personal loans to finance purchase orders, equipment costs, or early payroll cycles provide a vast pool of opportunity for investors, and a pool that can generate significant returns at over time.
But without the stability of a credit score or other financial data, how can lenders be sure they’re making the right choice? While SMEs have unmet credit needs totaling US$2.1-2.6 trillion, lenders still need to be careful when distributing funds, especially if investors are the ones providing the capital – and although small business owners are hesitant to seek out loans due to extensive documentation and collateral requirements. , many financial institutions still consider SMEs to be high risk.
So what is the solution? Open finance can help alleviate some of the problems with lending to SMEs. While traditional lending methods consider financial information such as sales, bank accounts and business transactions, SMB financial data APIs like Railz can connect lenders directly to a company’s accounting software, giving them a real-time preview of what’s going on in the solidifier. The financial services industry already has a lot of data, and using an SMB financial data API can help lenders save time when quickly standardizing, transforming, and analyzing that information.
SMB Financial Data APIs help streamline the application process – allowing lenders to provide loans faster and businesses to bypass documentation hurdles that would prevent them from applying in the first place. Since SME financial data APIs are directly tied to accounting software, they provide lenders with real-time accounting data, eliminating many of the risks associated with using company-provided financial statements or bank statements. . Combined with ways to standardize this information, SMB lending APIs can dramatically speed up the loan approval process.
SMBs have multiple bank accounts, credit cards, and expenses as part of their business operations, and accounting platforms are often used to centralize this data. SMBs use a wide range of accounting service providers such as QuickBooks, FreshBooks, Sage Intacct, Xero, Oracle Netsuite and others, all of which have different criteria for accounts, sub-accounts and transaction types. SME financial data APIs such as Railz provide clean, usable and standardized financial data and give lenders a clear picture of where they are considering investing.
Whether you are a large financial institution or an alternative lender, the small business loan market is growing. With millions of users and trillions of dollars at stake, financial institutions will need products like SME lending APIs to meet growing demand and make the best possible choices for their funds.