In sharp contrast with 2020, this summer is starting to show promising signs of a return to normalcy. COVID-19 vaccinations have been rolling out across the United States since the beginning of the year, businesses have begun to open up and welcome back employees, and consumers are engaging in the activities they’ve missed out on over the last year and a half. According to the Organisation for Economic Co-operation and Development (OECD), the U.S. economy is expected to grow 6.5% in 2021 after losing 3.5% last year.
As we begin to see the economy operate in this new normal, we are also going to see small businesses that have struggled through the pandemic begin to thrive once again. As existing and new small businesses look to invest in and grow their businesses, it is crucial for lenders to be prepared to assess the financial health of these businesses.
By harnessing the power of nontraditional with traditional data sources, lenders can get a broader and more holistic picture of businesses’ financial situation. This can open paths to capital that can directly help benefit underserved communities and the overall U.S. economy.
Consumers and Small Businesses are Ready to Re-Enter the Economy
The commercial market is experiencing expansion and elevated valuation as a record number of small businesses continue to open, while many consumers are ready and willing to spend. In fact, as the new year began, consumers had over $2.4 trillion in additional savings since the pandemic began according to the U.S. Department of Commerce’s Bureau of Economic Analysis.
Driven by multiple stimulus packages, stay-at-home orders and an unpredictable environment that encouraged frugality, some consumers have emerged from the pandemic with more savings than when they began. As a result, these consumers have the means to spend and the ability to repay.
Meanwhile, having leaned on government funding during the pandemic, business owners are now turning to private funding through commercial lenders, Fintechs and banks to help grow their businesses. This is reflected in some of the positive trends that have emerged this year. According to Experian’s Beyond the Trends report, commercial card originations grew 34% in Q1 2021, surpassing pre-pandemic levels with richer rewards and better offers for small businesses. Additionally, new commercial lines of credit were up 90% since the beginning of 2021, and delinquency rates have reached historic lows.
Nontraditional Data is Key for Commercial Lending Decisions
In short, there will be a lot of small businesses turning to lenders for their credit needs. According to a recent PIIE study, 4.4 million new businesses opened in 2020 in the United States, a 24% increase year-over-year, with that pace continuing into the first quarter of 2021.
Many of these new businesses are likely to have little to no commercial credit history. Subsequently, lenders will need to leverage new, innovative ways to assess these small businesses in order to make decisions that both adhere to their risk tolerance levels and meet the needs of business owners.
While traditional data sources will remain a staple when making lending decisions, it is essential to also utilize nontraditional data to fully understand each businesses credit needs and risk. Lenders can enhance their current strategies by leveraging expanded data that can include SMB digital availability, geolocation, macroeconomic data, firmographic data, and more.
Additionally, data such as social media check-in’s, customer reviews and completed Yelp and Google profiles are helping lenders evaluate risk on small businesses with limited credit history. Combined with traditional blended credit data, this approach helps lenders differentiate the resiliency and risk of small businesses. As we navigate through the second half of the year, non-traditional data overlays will become critical in the assessment of risk in 2021.
Recovery has continued to accelerate in the second quarter of 2021. As businesses emerge from a turbulent year, they are leaving survival mode and entering a new period of strategizing for growth and profitability.
As the demand on lenders continues to increase in response, leveraging nontraditional data sources will be critical to understanding the full financial situation of these businesses and will help increase affordable credit access for small businesses in underrepresented communities.
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