Despite the proliferation of big-box retailers, fast-food restaurants, and other iconic brands that dot the American roadside, the American economy is powered by small and medium sized businesses (SMEs). SMEs account for 99.7 percent of all U.S. businesses and employ about half of the entire American private sector workforce according to the Small Business Administration. Their success plays a large part in the continued economic growth that America is experiencing, but if they falter, so too will the American economy.
Over the past several years, banks and other financial institutions have tightened restrictions on loans and other forms of credit, especially to small businesses. Regulatory concerns have been a significant driver but also banks have a desire to better manage exposure to risk following the Great Recession.
While institutions have an obligation to mitigate risk, they must also ensure that small businesses have the tools and resources to build and grow their business responsibly. However, today nearly one-third of all businesses trying to obtain credit do not have any information on their credit history. They’re deemed credit invisible and loans are either out of reach or require the small business to outlay prohibitive costs to obtain a loan.
Small businesses are the backbone of the American economy, and directly benefit the communities they belong to. Without access to credit, businesses oftentimes cannot grow. Many small businesses looking to hire and scale, or even just stock inventory and make payroll, find that without the ability to access credit, they’re either unable to do so or reliant upon loans from the business owner. Extrapolated nationwide, the consequences involve stymied economic growth and the lack of new jobs for millions that enter or seek new roles within the workforce each year. Consequently, many small business owners live with constant instability and risk because there is little separation between personal and business finances.
Removing access to credit for about one-third of American businesses including many responsible firms doesn’t make sense to either lenders, businesses, or the economy as a whole. That’s why data scientists at Experian’s DataLab began exploring non-traditional indicators that can be tied to the likelihood of a business’s ability to repay a loan.
One such factor that we found to be constantly reliable for consumer-facing businesses are social media reviews. Social media is increasingly playing a role in how businesses connect to their customers, build their brand, and expand their reach to bring in new customers. On the flip side, consumers are using social media tools to find the most reliable dry cleaner or perhaps the most helpful hardware store within their community.
Experian’s DataLab is examining how these social media channels can make a connection between small businesses and expanding credit. For instance, a new business – like a newly-opened neighborhood bakery – might not have the credit history or the longevity of being in business to provide enough data to receive a loan from a bank. However, they may have built a positive and sustainable online reputation through large amounts of positive reviews across social media channels. These reviews can be a clear indicator that the business has staying power within the community and strong consumer appeal. Coupled with other non-traditional and traditional indicators, social media reviews can help lenders discern whether a company has the consumer appeal to survive or expand its customer base and bring in increased revenue to be in a position to repay a loan.
An added benefit for small businesses is that information can be culled through automation online, which can speed the decisioning process to one that’s instantaneous, ensuring they don’t have to wait months to access a new line of credit that could help them grow or just pay off their current debts.
These social media reviews can be reliable sources for financial institutions to find predictive behaviors for small business, open new access to credit, and mitigate risk. Online non-traditional Fintech lenders have been successfully including social media data in their decisioning process for several years now. By taking into account non-traditional indicators, these lenders are able to help small businesses access financial resources, while expanding their own portfolios.
Data has enabled Experian to empower businesses and individuals to make important financial decisions for decades. Data isn’t a static entity, we are constantly looking at new and non-traditional ways to evaluate data to obtain a more complete portraits on businesses. By doing so, it will create more job opportunities for everyday Americans – as well as powering growth for more American small businesses.
Eric Haller is the executive vice-president of Experian’s global DataLabs. He leads data labs in the US, UK & Brazil that support research & development initiatives across the Experian enterprise.