How data empower SMEs to finance their growth
Credit to Author: The Manila Times| Date: Fri, 03 May 2019 16:17:47 +0000
Small and Medium-sized Enterprises (SMEs) are often regarded as the backbone of modern economies. One of the major challenges in growing a small and new company is building trust and credibility. Gaining access to financing follows that same trust-building exercise, because at its core, financial institutions prioritize evaluating the likelihood that a client can repay the money they borrow.
How missing data lead to higher costs
SMEs tend to have less information about their company online, have less formalized business processes, and have fewer assets. This is perfectly normal given that these companies are in their early stages and are yet to establish themselves in their industry. However, it’s this particular lack of information and data which makes that trust-building process much more challenging for financial institutions to assess the creditworthiness of an SME. This leads to higher financing costs that manifest itself in a couple of ways: higher interest rates, increased processing time leading to lost business, or large collaterals that put the assets of the company or the owner at risk – and sometimes even all of the above.
How technology can fill data gap
Technology-driven solutions nowadays offer a shift in this perspective of assessing creditworthiness by providing an avenue to collect a new slew of data which can help determine the creditworthiness of a particular business. First Circle is leading this initiative by building a financial product which caters specifically to the nature and needs of these SMEs by providing an online platform for securing short-term SME working capital loans.
This platform directly empowers any SME to submit all the requirements and interact with First Circle solely through the website or through phone calls. By collecting this new suite of data, First Circle now has access to more information that can help better understand the SMEs’ businesses on a deeper level and ultimately, unlocks a new and seamless experience for the SMEs to prove creditworthiness.
What data do to cut financing cost
We can look at the challenge of building creditworthiness to come in two stages. The first stage is getting a clear understanding of the business at the onset. This stage is to set a baseline level of trust. As an example, if the business does not have stable revenues or the business model is unclear, it can be difficult to place trust in providing financial assistance to the company. The second stage is improving the assessment of creditworthiness over time. As more information about the business are collected, this second stage is focused on solidifying the trust established during the first stage.
Data can provide massive improvements in either stage. For the first stage, the goal is to collect the right information as soon as possible so you can make a fair judgment on the business. Having access to historical data and the ability to analyze them makes it easy to find opportunities for improvement and optimization of this process. An example of an improvement in this stage is to look retroactively at which pieces of information tend to be great predictors of creditworthiness which then can be incorporated in the application process of future SMEs, effectively creating a feedback loop that speeds up and enhances the process.
For the second stage, as First Circle generates more data on repayment patterns and the ongoing relationship with the SME, data and the application of modern data analytics methodologies help improve our understanding of the creditworthiness of cash flows in the economy. As every interaction between an SME and First Circle is logged, stored and processed in our databases, we are able to easily extract that data upon demand and build a more holistic view of the company over time. Improvement in the second stage could also be related to observing patterns with clients and using that to predict risk, repayments, and other forecasting exercises which may help First Circle and its operations.
Data driving down the cost of SME lending
As more improvements are made from the insights generated with data, we expect to see an improvement in both operational efficiency and credit assessment. These improvements, in turn, unlock lower interest rates, high credit limits and virtually zero collateral requirements — ultimately leading to less financing costs for SMEs. We’ve only scratched the surface of what improvements can be made and it is a continuing process which only gets better as data become more accessible to serve the needs of our economy’s backbone.
Andrew Escay is a Data Analyst at First Circle. His love for technology and numbers has led him to a data career in the FinTech space. If you’d like to connect, feel free to reach out at andrew.escay@firstcircle.com.
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