All posts by Gary Stockton

Experian met with LendIt Conference Chairman Peter Renton recently and during our talk he shared some valuable insights on marketplace lending and the growing Chinese peer-to-peer lending industry. Why do so excited about the Chinese peer-to-peer lending industry? I think there are two things, one is that it is massive, the Chinese market is so big it’s bigger than the rest of the world, combined.  And so that, I think, it’s an opportunity for everybody, and western platforms and Chinese platforms. But that’s not all, I think one of the things I think is most interesting about China is how they use technology particularly in the mobile space. The way these platforms operate on the borrower acquisition side, on the investor side it’s all done through mobile. And that is very different to what’s done in the West, so we’ve got a lot to learn. The Chinese experience is probably 3 to 5 years ahead of what the West is going to be. We all talk about “Well, we are going to move to mobile eventually” but it hasn’t happened yet and you talk to most platforms and the still the majority of their traffic is coming from through the desktop so that’s not the case in China it’s something like 80% or 90% coming on mobile sometimes even more. Some companies have nothing other than mobile traffic, they don’t even have a website. That’s why I think China is interesting and we can really learn a lot from the Chinese. Will we start to see U.S. companies make investments in China? I think the first thing were going to see from U.S. companies is them trying to attract Chinese capital, that is already started we have already seen some Chinese capital coming in, there’s been publicly available information like with one of SoFi’s investors is a Chinese company. The Chinese are making more equity investments in this space, we’re also starting to see debt capital coming from China into the U.S., so that’s definitely I think one of the ways that we will be connecting the two countries. The other is eventually we’re probably down the road two to three years minimum we are going to see western platforms going to China and either buying a Chinese platform or starting operations there. We’ve seen all of the major banks have done that, China such a big market, it can’t be ignored. If you want to be a global player you have to be in China so I think that’s probably the secondary second step, the first step is attracting capital. Is the Chinese market primarily consumer lending or using lending to small business? So it’s similar to the U.S. where really the consumer lending sector has led the way in marketplace lending and I think the same thing is true in China. There is definitely small business lending in fact small business lending is probably even needed more in China than the West because small business owner’s, entrepreneurs in China have very few options when it comes to obtaining financing, so these platforms are setting up to really fill that massive void. What goal should marketplace lenders consider when partnering with traditional lenders? If you talk about traditional lenders if you are talking about banks I think that is something that we’re seeing more and more just at LendIt today we had a whole session on bank partnerships, there’s been several other mentions we had Avant’s Al Goldstein this morning talking about their new partnership with Regions Bank. Regions Bank is a top 20 bank in the U.S. I think what’s in it for the platforms obviously is, if you look at the Avant deal they get two things, they’re sort of licensing their technology and their underwriting box helping these banks reach difficult to obtain customers and underwrite customers in ways that a bank necessarily wouldn’t have the expertise to do. So they are doing that and then with Avant they’re also getting referrals so the bank may have people coming to them for loans that they can’t or won’t underwrite so then they can refer them on to Avant, so I think that’s the best example. You talk about the Chase OnDeck deal, I’ve spoken with Noah Breslow about that and he’s mentioned that it was a long process. Chase is the biggest bank in the country, they’ve got a massive compliance department, they had to check every single box and so I think platforms they really need to be like professional grade shall we say. All of their compliance systems – he said it took OnDeck many months to get up to the standard that Chase was comfortable with, so I think having that sort of rock-solid compliance in place it’s great for a platform not just by partnering with banks but dealing with regulators they can see that they are checking all the boxes just like a bank would. What can you tell us about the new Marketplace Lending Association? It’s something that I’ve been passionate about for a long time.  We are probably a year or two overdue on having this association coming to be, but it’s better late than never. I think we really need to come together as an industry and have a unified voice when we’re dealing with Washington, dealing with lawmakers. Every industry that has an association that can be heard in Washington that represents the entire industry and I feel like, we just started, we just launched it a few days ago but I think it’s overdue and having that will help us not only just raise up the profile of the industry but really help us to talk directly with regulators and regulators aren’t going to say this is just one company with their own agenda this is the industry talking and they’ll pay more attention I think.

I sat down with Gavin Harding, Sr. Business Consultant with Experian who is attending American Banker’s Marketplace Lending & Investing Conference in New York City this week to get his perspectives. Interview with Gavin Harding Gary: Hello and good evening my name is Gary Stockton and I’m with Experian Business Information Services in Costa Mesa. I’m joined by Gavin Harding who is with our global consulting practice. Gavin is at the Marketplace Lending and Investing show in New York, Gavin how are you doing in New York? Gavin: Good evening Gary it’s good to be here. It’s a tremendous show this year. Very high-energy, very dynamic a little different to some conferences that we’ve participated in over the last couple of years. So some evolving themes. Two years ago, three years ago at this type of conference it was all about growth. Maybe a year ago it became more about regulation and compliance, kind of a more pragmatic approach. And this year it has evolved one more time into a core question of sustainability. How can marketplace lenders build a solid foundation that incorporates compliance, growth, risk, basic core principles of governance to make sure they become profitable and that they are still here in 3 to 5 years? So it’s really interesting to see those themes emerge over the last couple of years. Gary:  So marketplace lenders it seems like they are getting their houses in order right? We’ve had a few things happen in the last six eight months that kind of rattled the industry but I think a lot of them have taken a step back from that rapid growth pace to get you know compliance and things like that in order, and a lot of them are pursuing partnerships with lenders right? Gavin: That’s right. So, some of the key drivers have changed over the last year have been some things in the news that kind of shook the industry up a little bit, caused both marketplace lenders themselves and the investment community and the banks and bank partners to stand back a little bit and pause, and address some really key fundamental questions. So, one of the questions, I want to take this from a bank perspective. There was a great program this morning. Four panelists -  one banker and three marketplace lending lawyers, and the question was about the interaction between banks and marketplace lenders, and it was really interesting questions that were asked and one of them was, if every marketplace lender has its core competency, it’s target market, the thing it does differently and better than anybody else the differentiator, the key question for the bank partner is how real is that? How do we know? How do we document that? So there’s definitely more of a, it’s great to share the story with the bank partner, now the bank partner is saying that’s great I like the story, now let me show or let me see some evidence how it works, show me that you are adhering to your model consistently. Show me that you were documenting what you’re doing. Show me that you are being fair and disciplined in your credit decisions. Prove to me that when you say your portfolio is grade A+, that it actually is grade A+. So, not so much a skepticism, more a real life pragmatism to fully engage with the marketplace lender and to understand their model down to a granular level in terms of process, in terms of business governance, management practices and so on. So I see it as a convergence of the new innovative approaches of marketplace lenders, and the more traditional approaches of banking. So I see the two as coming together being more engaged and aligning more closely and again that overall pragmatic approach is prevailing. Gary: Are you seeing, last year there were a lot of international companies starting to come on the scene there were a number of Chinese marketplace lending companies, is that kind of still the case or is it pretty much domestic US marketplace lenders? Gavin: So with this particular event this year it seems it’s mainly U.S. based however there are some global players. I’m not seeing a lot of participants and attendees from Asia for instance where at prior events we would have seen more of them. Gary:  And so looking at the agenda are there any sessions that you personally are looking forward to? Gavin: Today the one that really resonated with me was the session on bank partnerships, exactly how they can work and the one theme that was a central core statement from that is, compliance is now a price of entry. Compliance is not a want to have. The marketplace lender has to have solid documented procedures in place to have a conversation with a bank. This doesn’t mean that there needs to be an exact mirroring of the bureaucracy and really deep compliance processes in a bank, but it means that the marketplace lender has to understand the banks perspective, has to speak the banks language and needs to understand the regulations with which the bank is complying. That’s now the expectation from banks of their marketplace lending partners. And that changes the world significantly for them. There is a demand for better alignment and mutual understanding, high levels of transparency and the application of fundamental principles of management and good governance so for me that session today resonated. I think it was a long time coming, and it was good for the group to hear that. Gary: That’s great so you’re there tomorrow and you’re speaking at the conference right? Gavin: Tomorrow afternoon we have a session that should be pretty interesting, it’s a panel session and it is centered on building sustainability in your portfolio. Let me tell you kind of where that comes from and why we’re talking about this. So there has been over the last year and a half, a tightening in terms of the availability of capital for marketplace lenders, a heightening in the demand from investors and from bank partners and others, heightening in the demand for additional information and more granular data on what’s in the portfolio, portfolio content, predictive performance, risk profiles and so on and so forth. To continue to address those needs marketplace lenders need to look within their portfolio to add components in terms of reporting, in terms of upfront origination discipline, ongoing management so that as they approach partners to look at these portfolios and invest in them, the partners can gain a level of confidence that the portfolios are as presented. So tomorrow I will be speaking with two other panelists, one from the world of regulation compliance in an advisory capacity working for a law firm in DC with a long history of working in the regulatory and supervisory market. And the perspective of the other panelist is from a firm that assesses portfolios, stress tests portfolios, establishes valuations and so forth, again related to our conversation on investment, the investment community, the reduced availability in capital of capital and the demand for more information and then I’ll be giving some examples of some work we’ve done with clients in terms of trying to understand the portfolio. Of presenting the portfolio in industry-standard approaches, industry-standard scores, industry-standard analytical approaches that can help bridge a portfolio to the investment community, and help that investment community gain a level of comfort that they need. So I think it will be a lively discussion, I think we got some great diversity in the panelists, and from what I saw today I think the audience is going to be very engaged and ask some tough questions. Gary: That’s great so do you think you might have time tomorrow to give us another recap from the event? Gavin: I’d look forward to that. Gary: OK. Well I want to thank you for taking time out I know that you very busy there it’s in the evening so thanks for staying back and giving us your update and we’ll look forward to another chat tomorrow around the same time. Gavin: You’re welcome thank you Gary.

We know that small business is the heart of the U.S. economy, driving the majority of private-sector employment. But just how successful in managing credit is the average small business owner compared with the average consumer?  In a new data study titled The Face of Small Business, Experian examines key credit and demographic attributes of both groups and uncovered distinct differences. Experian presented the full research from our data study in a webinar recently. Watch Webinar Experian took a random sample of 2.5 million small businesses and 1 million consumers to base the research. Findings show that small-business owners outpace consumers when it comes to credit management. For example, the average personal credit score for a small-business owner is 721 — 48 points higher than the average consumer score of 673. Small-business owners also have a higher amount of available credit, with an average credit limit of $56,100; while consumers have an average credit limit of $26,900. Debt load, however, is also higher for small-business owners, with the average total balance of all trades being $195,000 versus $96,000 for consumers. Small business owners have higher monthly payment obligations with an average payment of $2,032 compared to $954 for consumers. Despite these differences, only a relatively small percentage of small-business owners (5.9 percent) have one or more revolving bankcard trades that are 90-plus days beyond terms in the past 24 months compared with 7 percent of consumers. Download our Infographic “Since the health of small business tells the tale of how the overall economy is performing, it is encouraging to see that while small-business owners have an exceptional amount of credit available to them and carry a higher debt load, they have done a great job managing their payment obligations and keeping utilization low. In order to explore possibilities and pursue opportunities, consumers and small-business owners alike need to master the credit management skills that will allow them to achieve their dreams — whether that dream is to start or expand a business or to finance a new home or vehicle.” Pete Bolin Director of Consulting and Analytics Experian Demographic differences In terms of demographic characteristics, small-business owners are more likely to own a home and have a higher income than the average consumer. For example, the average income for small-business owners is $91,600 versus $70,400 for consumers. Also, 62 percent of small business owners own a home compared with only 47 percent of consumers. Small-business owners tend to be a bit older and are more likely to have pursued higher education than the average consumer. The average age of a small-business owner is 56, and the average age of a consumer is 51. From an education perspective, 68.6 percent of small business owners have attended some college and beyond, while only 53.5 percent of consumers have done so. Other highlights from the report: The average mortgage balance for small-business owners is $192,000 versus $147,000 for consumers. The average number of open trades for small-business owners is 7.4 versus 4.4 for consumers. The balance-to-limit ratio for small-business owners is 29.5 percent compared with 30.1 percent for consumers. A higher percentage of small-business owners are married, with 68.3 percent having tied the knot versus 53.4 percent of consumers. The average gender breakdown for small-business owners is 65.6 percent male and 31.2 percent female. For consumers the mix is more equal, with 46.4 percent female and 47 percent male.

Latest Main Street Report findings offer cautious optimism as small business bankruptcy rates and delinquencies decline Experian has released the Q2 2016 Experian/Moody's Analytics Main Street report. The report offers a unique quarterly snapshot into the health of small business credit in the United States. The report states current credit conditions for small businesses are improving across most of the country. Overall small-business delinquencies decreased slightly from last quarter, with dropping levels in every stage of delinquency. The total bankruptcy rate fell as well, although at a slower pace than the previous year. "Small business owners have done a great job of managing their financial commitments and paying their bills on time over the past few quarters. This has led to an increased level of available capital which could enable them to expand or invest in their business to grow their enterprise. It will be very interesting, however, to watch the current trends unfold throughout the rest of the year as administration and potential policy changes, as well as the impact of Brexit and other global events could affect U.S. business behavior." Gavin Harding Sr. Business Consultant, Experian "Small businesses are doing well, and their near-term prospects are good. Delinquencies and bankruptcies are steadily declining, reflecting solid sales, low interest rates, and generally light debt loads. The only blemish is for businesses in the still struggling energy and related industries." Mark Zandi Chief Economist, Moody's Analytics   While current conditions enable small businesses to have an abundance of credit available to them, the average utilization rate was down almost 22 percent from the same period in 2015. The report found that this decline is the result of a slight increase in credit limits and a steady increase in balances. Other Q2 2016 highlights: The mining industry experienced the sharpest increase in severe delinquencies and bankruptcies across all industries in the second quarter. The transportation and utility industries also experienced a decline, with the average severe delinquency rate increasing by 30 basis points during the quarter. Construction has seen the strongest improvement, with severe delinquencies dropping by nearly one third in the last year and a half. Construction bankruptcy rates, however, remain high in West Virginia and New Mexico, with rates of 0.59 percent and 0.44 percent, respectively. Bankruptcy rates along the Eastern Seaboard tend to be below the national average. About the Experian/Moody's Analytics Main Street Report Developed by Experian and Moody’s Analytics, the Experian/Moody’s Analytics Main Street Report brings deep insight into the overall financial well-being of the small-business landscape, as well as provides commentary around what certain trends mean for credit grantors and the small-business community as a whole. Key factors comprised by the Main Street Report include a combination of business credit data (credit balances, delinquency rates, utilization rates, etc.) and macroeconomic information (employment rates, income, retail sales, investments, etc.)  

Experian Business Information Services and Moody’s Analytics have joined forces to develop the Experian/Moody’s Analytics Main Street Report.  The report leverages a combination of business credit data (including credit balances, delinquency rates and utilization rates) and macroeconomic data (including employment rates, income, retail sales and investments) to provide a more accurate assessment of the health of small businesses. Small businesses are the engine of the U.S. economy - employing the majority of U.S. workers, so with this quarterly report Experian seeks to provide a unique view into the health of those small businesses, offering a benchmark on their overall financial health, and emerging trends across major industry sectors. “Gaining deeper insight into the health of small businesses is important for credit-granting organizations, as well as the small-business owner. While credit grantors can leverage the information to make more profitable financial decisions, small-business owners can better understand the fluctuations in their industry and region. By working with Moody’s Analytics, we are able to combine our expertise and data resources to deliver a more holistic view of the trends impacting the business community in particular and the economy overall.” Gavin Harding, Sr. Business Consultant Experian, Global Consulting Practice Q1 2016 highlights The first quarter 2016 report shows that credit conditions for small businesses have remained relatively stable, as delinquency and bankruptcy rates hold steady at low levels. In fact, much of the slight decrease in delinquencies was driven by fewer small businesses falling within the 61 to 90 and 91+ days past due categories. Additionally, the Q1 2016 report shows that small businesses have begun to expand their credit lines while keeping their utilization rates down. Through a combination of the increase in credit availability and small gains in balances, the average credit utilization for a small business dropped nearly 17 percent from the previous year. “Small business credit conditions continue to improve, and near-term prospects are good.  Delinquencies and bankruptcies have declined in most industries and regions of the country for more than a year. The energy industry is the only exception. There are threats to the positive small business credit outlook, including prospects for rising interest rates and volatile financial markets, but those threats appear modest.” Mark Zandi, Chief Economist Moody's Analytics   Other Q1 2016 findings: Despite a strong economic performance relative to the rest of the country over the past several years, bankruptcy rates were elevated in the Southwest and the West Delinquency rates for the retail industry ticked up slightly during the first quarter of 2016 as a result of weak retail sales The top three states with the highest average business credit score* were Vermont (62.6), North Dakota (61.8) and South Dakota (61.7) Download Main Street Report

Analysis highlights credit characteristics, industry preferences and demographic attributes of business owners As part of its analytical series on small businesses, Experian®, the leading global information services company, today announced new insights that look at the health of minority-owned small businesses in the U.S.. “Given that minority-owned small businesses make up such a small percentage of the general small business population (approximately 21 percent), industry professionals and regulators are increasingly becoming more interested in helping this segment grow and succeed,” said Pete Bolin, director of consulting and analytics for Experian. “A primary component to accomplish that objective is to educate small business owners on the importance of maintaining a positive credit profile. For example, keeping debt levels low and paying bills in a timely manner can help small business owners better position themselves for growth opportunities.” Findings from the study show that, compared with the overall small business population, minority businesses are slightly behind when ti comes to credit management. For example, the average business credit score* for a minority-owned small business is 49.7, nearly 5 points lower than the general small business population. As a consumer, the average credit score for a minority small business owner is 707, 15 points lower than the overall average of small business owners. In terms of payment behavior, 1.2 percent of minority small business owners had at least one business credit card account severely delinquent (91-plus days), while 8.3 percent had at least one consumer credit card account severely delinquent (90-plus days). Comparatively, 1.1 percent of the general small business owner population had at least one business credit card account severely delinquent, and 6.8 percent had at least one severely delinquent consumer account. Most popular business types Experian’s analysis also identified the most popular industries for minority-owned businesses. The analysis showed that the industry of choice was eating places, which accounted for 7.3 percent of minority-owned businesses, followed by beauty shops (5.8 percent), legal services (2.9 percent), business services (2.7 percent) and real estate (2.5 percent). Regardless of industry, the analysis found that the average consumer income for these business owners was $92,489, which is similar to the general small business owner population which has an average consumer income of $92,338. From an education perspective, 65.6 percent of minority small business owners had at least some college experience, just slightly less than 68.3 percent for the general business population. “Gaining insight into the trends and behaviors of the small-business community is imperative given their importance to the growth and success on our overall economy,” continued Bolin. “While a person’s ethnicity will never be used in a credit decision, understanding the trends of minority-owned small businesses enables credit grantors to help these business owners find the appropriate lending products to expand their establishments and succeed.” Other findings include:   Approximately 7 percent of all minority-owned businesses are based out of the home, while more than 10 percent of the general small business population is home-based More than 31 percent of minority business owners are women Nearly 45 percent of all minority-owned small businesses come from three states: California (23.4 percent); Florida (11.4 percent); Texas (10.1 percent) Minority business owners have an average outstanding business balance of $8,759, while the general business owner population has an average outstanding balance of $9,066   Resources for business owners Understanding and monitoring their business credit profile to ensure it is in good standing is a critical step for small-business owners to gain access to financial capital and grow their establishments.  With the insights that business credit reports provide, small-business owners can take the appropriate actions necessary to positively impact their business. Experian provides some helpful resources to help small-business owners gauge the health of their business, including: BusinessCreditFacts.com - an authorative source for understanding and learning about the benefits of managing business credit. Visit https://www.businesscreditfacts.com. Experian Business Credit - a site that enables small-business owners to access a copy of their business credit report and helps them understand the impact maintaining a positive credit profile can have on a small business. Visit https://www.experian.com/businesscreditreport.  Business Score Planner™ -  an educational tool for business owners to understand how financial plans and changes to commercial credit information can impact a business credit score. Visit https://sbcr.experian.com/scoreplanner.   Methodology The analysis is based on a statistically relevant sampling of data from Experian’s consumer and business credit database from December 2015. Average scores are an average of the sample, and are not representative of national averages of the consumer or small business. Ethnic background was obtained from Ethnic Technologies, a provider of multicultural marketing data, ethnic identification software and ethnic data appending services.    

According to the U.S. Small Business Administration (SBA), small businesses account for 99.7 percent of U.S. employer firms and 64 percent of new private-sector jobs. So it stands to reason that the way small businesses go, the economy probably follows suit. One of the biggest challenges for small businesses, however, is the ability to access capital. In order for them to grow, they need money. Many of these smaller firms have limited to no credit history on file. For that reason, it is imperative for lenders and trade creditors to leverage comprehensive data sources (both financial and non-financial), enabling them to make smarter business decisions and help small businesses access credit. It is Experian’s core belief that an open and secure data sharing program is crucial to helping small businesses get the credit they deserve, and it's Small Business Credit Share® program is at the center of this ideal. Small Business Credit Share℠ is a Credit Data Sharing "Club" Small Business Credit Share℠ (SBCS) is a consortium of banks, credit card companies, leasing agencies and other companies that have agreed to provide financial and non-financial data in exchange for exclusive access to data from other contributors. By gaining access to this database, lenders and trade creditors can make more informed decisions, while also promoting financial inclusion and spurring growth within the small business segment. Currently, six of the nation's top ten financial institutions are members, as well as several telecommunications and utilities companies. Small Business Credit Share℠ offers more aggregates (data elements) than any other service of its type. Whereas many lenders rely primarily on summary data (e.g., a credit score and reports of missed payments over the past year), Small Business Credit Share reports include a vast array of detailed credit, financial and non-financial data. As a requirement of membership, members must contribute at least 10 pieces of data on each small business account, such as account types, highest credit utilized, total account balance and payment history profiles. Together, these aggregates provide a much deeper, more meaningful view of a small business than was ever possible when drawing from just a handful of sources. They have also proven to be a far more accurate predictor of credit risk than any other service Membership Provides Benefits to Financial Institutions and Borrowers Alike Small Business Credit Share℠ provides significant benefits to member institutions as well as to the customers they serve. For example, Small Business Credit Share allows members to see the obligations an applicant already has to other lenders. With this knowledge, a lender can make sure an applicant does not become overextended and thus jeopardize their ability to pay back the loans already outstanding. A lender can also generate reports that, when shared with a customer, help ensure that paying back that lender becomes a priority so as to strengthen their credit score. Small Business Credit Share can also help members achieve SBA compliance, as the SBA mandates reporting to "bureaus" for all SBA-backed loans (SOP 50 57). To Get More, Give More As in life, what you can get out of the Small Business Credit Share℠ tends to be directly proportional to what you put into it. The more data members share, the clearer the picture of their small business borrowers becomes, and the smarter credit decisions they are able to make. Watch our Small Business Credit Share Program Overview Video We're encouraged by the overwhelmingly positive reception the Small Business Credit Share has received from the financial industry as a whole and from our member companies in particular. We remain committed to the idea that financial inclusion provides a strong value proposition to the Financial Services community, and believe Small Business Credit Share aligns with that ideal. Small Business Credit Share

Businesses are faced with the need to collect on delinquent accounts. When pursuing these past-due accounts, the most successful way to approach them is with a combination of perseverance, politeness, and professionalism. This serves the dual purpose of increasing the likelihood of receiving a prompt payment and also staying within the guidelines set forth by the Fair Debt Collections Practices Act. Perseverance While constantly calling a customer for payment can be a drag, perseverance will pay off—literally. Keep notes when calling the customer, detailing when you called, the time you called and if the customer promised payment. If payment was promised, make a note of when. Most software will have note-taking capabilities, so use that to keep track of whether the customer is following through with payments or not. Aim to call once a week to keep your company in the forefront of the customer's payable person. Politeness Being polite can be trying when the customer is being evasive about payment status. Remember the old adage of catching more flies with honey than vinegar. Being polite gives the customer less reason to avoid payment. Share a story or joke with them. Get familiar with the person doing the payments for your business. Avoid negative outbursts containing vulgar language or calling multiple times per day, which are both violations of FDCPA code. Professional Above all, remain professional. Do not allow emotion or personal feelings about the customer cloud your attitude. This is strictly business, and the customer who may be slow or evading payment would do the same to anyone else in your position. Talk to them about payment plans if they are having a hard time paying. If they are hesitant to pay, ask for the reason why. Is there an issue with the product or service your company offers? If there is a problem with the product, talk to product/servicesupport staff to see if they are aware of this issue. If they are, ask them to contact the client with the solution. Sometimes it is necessary to involve sales representatives while collecting. The sales rep can go in and play "Good Cop," letting the customer know that they would love to sell them more product or further service, but that there's a problem with the account that needs to be resolved with the customer's accounts payable department. This normally results in the procurement associate contacting the accounts payable department and asking why payment has not been made on the prior purchase. Thisfacilitate payment, and in turn, increase company cash flow. Using these techniques will reflect respect and courtesy, which in turn elicits goodwill with the customer. Business Chat | LIVE - Credit & Collections with Katie Keitch We had a great interview about best practices in B2B Collection with Katie Keich. Katie is the V.P. of Commercial Services at InsideARM. She shares how to drive a successful collections strategy in your credit department or through 3rd party collections. Learn more about InsideARM

Online lenders represent a valuable resource for small businesses in need of working capital. Also known as "alternative" lenders, they are particularly useful to new businesses lacking the long, detailed credit history that banks and traditional lenders usually require to underwrite a commercial loan. This is why online lenders have become so popular with newer restaurants, small retailers, young business service companies and other enterprises that have no other place to go for working capital. Being unregulated, online lenders can be far more lenient with their lending requirements. However, online lenders don’t lend blindly. They don’t base their decisions on a catchy name and an inspiring mission statement.  Online lenders have numerous sources of data upon which to base their decisions; as you might imagine, many of these sources are as "non-traditional" as the lenders themselves. For example, there are many names people use to describe the new types of data online lenders use to qualify applicants, such as “Big Data,” “alternative data” and “online data.” Essentially, they all mean the same thing: Readily available information that can be used to determine a business' financial health above and beyond traditional credit scores. New Data Sources for Online Lenders In addition to checking accounts and tax returns, online lenders may use any number of alternative sources of data to evaluate potential borrowers, including: Social Media. What customers say about a business on various social sites offer more important clues as to a business' health. A business with high ratings from a large number of customers may be a good risk, even if it's only been in business for one or two years. Online Financial Activity. Heavy activity on sites like PayPal or Ebay can suggest a healthy cash flow, something that's important to many online lenders. Permissioned access to business checking account information also allows lenders to better assess cash flow. Accounting Software. Having direct access to a borrower's accounting software (e.g. QuickBooks, FreshBooks) allows a potential lender to observe and track a borrower's financial activity in real time. Such data can also provide a lender with an early warning signal should the borrower suddenly get into trouble. Shipping Data. If a borrower is a retailer, whether B2B or B2C, are its products moving? Shipping data -- both volume and frequency -- is another valuable indicator of financial stability. Privacy & Security Issues How do online lenders capture this data, particularly the proprietary information not readily available through a Google search or social media? They get it straight from the borrower. When a business owner agrees to an online loan, they're often agreeing to provide the lender direct access to their business checking, accounting and management system. And sometimes not just for a one-time look, either. This may involve long-term access so the lender can keep an eye on its investment. The downside to this arrangement is, of course, privacy and security vulnerabilities. The upside is that it may help expedite future borrowing. Interpretation is Critical Of course, data by itself does not tell the whole story; it must be properly interpreted. This is particularly true of alternative data. For example, the ratings a restaurant receives on social media can't be judged against ratings for a dry cleaner. A restaurant in any city is likely to get far more social media coverage than is a neighborhood dry cleaner. However, a dry cleaner with just two or three reviews may be a far better business risk than a restaurant with 10. It's all about being able to interpret, normalize and glean insights from the data you collect. Packaging Online Data for Risk Assessment Five years ago, Experian created its Global Data Laboratory in San Diego for the express purpose of mining alternative data and seeing if it could be packaged as a commercial product to help online lenders and other companies evaluate new, small companies. Staffed with a team of Ph.D.’s in data science, the lab has built a one thousand (1,000) terabyte database containing information from thousands of sources. "One of the big challenges any lender faces is determining if a borrower is legitimate. This is true even for traditional businesses, like a Home Depot that may want to open a credit line with a small contractor that has little or no credit history. For every 100 companies that are 'invisible' to lenders, we can now establish the legitimacy of 20 businesses using nothing but online sources. That means a business can now have as much as 20 percent more customers than before just by accessing this alternative data. The lab's new algorithms are also highly predictive of a company's longevity.” Eric Haller EVP Experian Data Labs For new and emerging businesses, leveraging data from the Web can deliver a 40 percent lift in predictive performance compared to the industry averages for predicting whether a company will go out of business or not. Just Part of the Equation As useful as alternative data is, it’s just part of the algorithm an online lender uses to score borrowers. Traditional credit scores are usually still part of the evaluation process.  When available, nothing predicts credit risk better than credit history. Even the most sophisticated online lenders are still going to look at trade experience, business registrations and other third-party information. Alternative data sources become just one part of the equation. New sources of customer information and readily available online data, combined with traditional data and metrics – and the experience necessary to properly interpret both – has created a robust online financial marketplace and gives small business owners unparalleled access, flexibility and choice when it comes to capital financing. While it's still a bit like the Wild West, the world of online lending continues to grow robustly. Through the use of Big Data, Experian is able to provide insights that help minimize risks for borrowers and lenders alike. That helps everyone. Related articles Just how alternative are today’s online marketplace lenders? How online marketplace lenders are changing the rules of small-business finance Self-Regulatory Program for Nonbank Small Business Lenders Top regulatory priorities for commercial lenders Playing to Your Strength - Opportunities for Regional Banks to Build Better Lending Portfolios Game Changer - How Marketplace Platforms Are Bringing Financial Institutions Back to Small-Business Lending Marketplace Matchmakers - How Loan Aggregators Bring Borrowers and Lenders Together New Frontiers - What's Next For Marketplace Lending?