By Brad Kime, President — April 23, 2012
Increasing Main Street’s access to capital is a key piece of our economic recovery. The millions of local businesses nationwide represent a critical segment of the economy, yet the vast majority cannot secure financing. According to a recent survey by the Federal Reserve Bank of New York, only 16 percent of small businesses that seek financing receive the full amount they need.
As we take a closer look at this lending challenge, it’s important to understand the fundamental problems facing both lenders and borrowers and how technology can be used to solve them.
For banks, serving Main Street businesses has historically been difficult — and it largely comes down to a simple issue of time and cost. Underwriting any business is labor-intensive and costly. So, the amount of time and effort banks are willing to invest in deciding whether to grant a $50,000 loan for a small business with $500,000 a year in annual revenue is going to be a fraction of the time they will put into making a decision about a $1 million loan for a business doing $10 million a year in revenue.
The lack of a cost-effective infrastructure to efficiently analyze small businesses has forced banks to rely on an inaccurate shortcut: The personal credit score of the owner. It is a fast and inexpensive way to make a judgment. However, it reflects the personal payment history of an individual, not the current financial state of the business. While this piece of data is easy to procure, it is a highly inaccurate indicator of creditworthiness.
Read the full article here.