Technological advances and the expansion of big data are impacting nearly every facet of business, including the business loan process.
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Technological advances and the expansion of big data are impacting nearly every facet of business, including the business loan process. This results in increased efficiencies, improved accuracy of evaluations, and speed of funding.
What it has brought us is the convenience of applying for a business loan with the possibility of being approved within minutes, as opposed to waiting days or weeks.
Technology and big data benefits lenders and business owners alike. For example, e-signature software and online applications make it nearly effortless for business owners to apply for funding.
In turn, the availability of data allows for lenders to have increased visibility into other areas of payment history and credit beyond the major credit bureaus. Alternative lenders have more information than ever before to make informed lending decisions.
So, how can business owners further benefit from this trend? Let’s find out.
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What IS Big Data?
It is very tempting to dismiss the phrase “big data” as yet another jargon-y piece of techspeak from Silicon Valley engineers. But it actually is important to understand and quite relevant to business owners in all industries.
As more and more information is collected and stored about both individuals and companies, “big data” is simply shorthand for a new way of analyzing patterns and making predictions by using information of all kinds.
Computer processing power and cloud data storage is so powerful that even something simple like weather patterns can be cross-referenced with historical shopping habits to learn valuable things about, say, how a small boutique in a bustling part of town will fare during an average Tuesday in February. Throw in how many comments a sale announcement garners on said boutique’s Facebook page and you can see how data might be useful to a lender considering providing the boutique owner with a new loan.
When we talk about big data, we include a wide array of information: Yelp reviews, social media engagement, sales tracking software information and other factors that may reveal useful details about a business. All of this information can be integrated into algorithms used by lenders to evaluate the fitness of a small business for a loan.
It’s the Beginning of a Revolution…
Most companies are only at the very beginning of using data and technology in their daily operations. Those that do are in a much better position to access capital.
“Rapid access to operating information, account data, workflows, order flows and market intel are important competitive advantages and savvy lenders and investors understand this,” explains Steve Sadler, CEO of Allegiancy, a commercial real estate asset management firm based in Richmond, Virginia, in an email to Business.com.
There is a great deal of technology currently available that can be integrated with business operations to vastly improve operating performance. Examples of these products include Customer Relationship Management software like Salesforce or Pipedrive designed to track the sales pipeline. By embracing the cloud to store data, even small business owners can get into the game.
Capital markets are in a state of evolution and it’s important to be aware of how things are changing. The JOBs Act, or Jumpstart Our Business Startups Act, is a law intended to encourage funding of United States small businesses. It eases various securities regulations and was signed into law by President Barack Obama on April 5, 2012.
Along with crowdfunding and alternative lending, the new law will have a dramatic impact on the democratization of capital. Funding is becoming more readily available to small and medium-sized enterprises. Technology and big data are helping along the way.
“As transaction costs are reduced,” Sadler explains, “capital can efficiently flow to younger companies and I expect we will see a stunning return of dynamism to our moribund entrepreneurial ranks.”
Alternative Leaders Use Data to Meet Demand for Capital
Change is good news, because traditional small business lending has been on the decline for the last 30 years. Fewer banks make the loans and smaller loans are ever harder to get. In fact, Sadler notes the SBA sponsored loan programs are in such high demand that Congress had to deliver additional funding mid-year.
“This has created the opportunity for alternative lenders. Their data-driven and technology-enabled platforms are more efficient than traditional banks,” explains Sadler. “The availability of data allows for lenders to have increased visibility into other areas of payment history and credit, beyond the major credit bureaus. With this, alternative lenders have more data to make informed lending decisions.”
In other words, alternative lenders can really get to know a small business, beyond just bank statements. It’s a powerful new world of data points.
According to Harvard Business Review, over 51% of small businesses are seeking loans of under $100,000 however most banks significantly eliminated loans below a certain threshold typically $100,000 or $250,000, as a way to limit time‐consuming applications from smaller and less sophisticated businesses.
The reality is that transaction costs associated with underwriting small loans are high, as processing a $50,000 loan costs nearly as much as processing a $1 million loan, but with less profit.
Think About What Open Data Reveals About Your Business
It’s a good idea to consider creative use of data when we talk about the revolution it provides. By harnessing information, small business owners can be just as savvy as bigger companies and more agile when it comes to change.
“The key here is not the access to more of the same data, but to open, or publicly available, data,” writes Vaclav Vincalek, president of Pacific Coast Information Systems in Vancouver, in an email to Business.com. “The new lenders can much faster incorporate weather data, city data, and anything else that could help predict the direction of the market. It is common to sift through data from social networks, or use Google Trends and Alerts.”
For example, Vincalek explains, a few years ago a new startup in the landscaping business realized that there weren't enough hours in a day to both cut grass and visit new customers with work quotations. The solution? Google maps.
The resolution from the Google application was sufficient enough to identify how much grass was present in each yard and how many trees existed so the business owner was able to provide a reasonable estimate. The quotes could be prepared at any time, even after dark, without ever needing to visit a potential customer. The daylight was dedicated to cutting grass and making money.
“If you are a lender, you can start collecting all this data and predict how well your money can perform, set your risk and even provide market intelligence to your customers,” writes Vincalek. “After all, you want them to succeed. Welcome to the new world of lending.”
The upshot for business owners? Data of all different stripes is becoming important. There are no more secrets when it comes to operations or sales forecasts.
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Focus on Fundamentals
What now? The key is not to get too paranoid about Big Data. Yes, be aware of it. Yes, be consistent with your business’s online identity. Track the variables you can track using technology that makes sense for your company.
But then, focus on old-fashioned fundamentals if the goal is to grow your business and secure a new loan. This means maintaining a good personal and business credit score with a solid revenue stream. With ever-more options for new funding, including alternative online lenders, small business owners are in a strong position to benefit from new technology and big data.