Online lenders are revolutionizing the lending industry and facilitating business credit in meaningful ways that help businesses grow. When businesses turn to online lenders, they don’t have to deal with time consuming applications or lengthy approval processes. More importantly, these businesses don’t have to have an established credit score. Instead, they can leverage their online data to create a picture of their creditworthiness. Although the process can vary from lender to lender, here’s a look at the benefits:
Automated Application Process
Traditional lenders use a lending process that hasn’t changed for 50 plus years. Relying on manpower for processing, they painstakingly put together information about a company based on its business plan, loan application, revenue history and credit score, and businesses without established credit scores are typically locked out of this process. Online lenders, in contrast, can offer a business line of credit without the reliance on manpower or traditional financial metrics. The entire process is fully automated, reducing manpower and ultimately making processing cheaper, savings which are frequently passed onto the lender.
The automated process affects every aspect of the loan beginning with the review of the application and continuing through the date of the final payment. Once the line of credit has been granted, borrowers receive automated communications about balances and payments due. The payment process is also automated, and while the line of credit is active, many online lenders continuously monitor the borrower for changes in risk, thus allowing them to increase or decrease the line of credit or the associated fees to keep them in step with risk as measured in real time.
To ensure they can offer as many loans as possible, online lenders take strategic steps to minimize risk before before and during the life of the loan. In addition to accessing thousands of data points to identify risk and creditworthiness, alternative lenders also monitor risk throughout their relationship with the borrower, and they adjust the terms accordingly. This allows many online lenders to underwrite millions of more loans than they otherwise would be able to do.
For example, Kabbage reassess its borrower’s risks monthly, and it changes its fees as needed to reduce risk. In addition, it also examines the client’s payment history, and if the full balance is remitted in full, Kabbage lowers the fees on future withdrawals from its business line of credit
Leveraged Data Points
Online lenders leverage thousands of data points to determine how much credit to extend their borrowers, and they use complex data models to weigh different elements in unique ways that accurately assess and ultimately minimize risk. Some online lenders also build platforms which can help other prospective online lenders set up a lending business, and these completely scalable platforms can contain data models which are customized to the client base of the lender in question.
To assess how much revenue a company is collecting, online lenders look at sales data from sites such as Etsy, eBay and Amazon. They also examine merchant accounts from Paypal and similar organizations, as well as accounting data from the company’s QuickBooks program. Finally, online lenders evaluate ephemera such as the company’s influence on social media accounts such as Facebook and Twitter or its UPS shipping history.
However, the data points analyzed aren’t just dollar amounts. Rather, online lenders use complicated processes to analyze a range of indicators. For example, if an online lender was looking at an individual’s Esty account, it would take into account revenue collected, but it would also analyze elements such as the age of the company’s account, its seller rating and its transaction volume. This allows the lender to create a clear picture of the company’s current state as well as a picture of its likely future progress.
Reducing fraud and improving security makes the loan process safer for the applicant, but it also helps the lender minimize costs and offer more loans. Online lenders simply don’t have the paper trials of traditional lenders, and because the process is automated, fewer people ever come into contact with the company’s details, eliminating the risk of data leaks.
In terms of internet security, online lenders use security tools such as TRUST and VeriSign to keep the information transmitted through their sites safe. In addition, although online lenders use data points from a number of online service providers, they typically do not save the applicant’s usernames or passwords. Rather, online lenders redirect applicants from the lender’s site to the third-party site, and then, they prompt them to sign into these services to verify their ownership of the accounts.
Online lenders are making it easier for small and mid-size businesses to access the capital they need. Through their 100 percent automated process, they tap into a company’s financial DNA, and they determine whether or not the company can handle a line of credit and how much it deserves. They take steps throughout the relationship with their client to keep risk low so that they can ultimately offer that client as well as millions of others loans or limits that they likely would not be able to access in a traditional business lending setting.