The Responsible Business Lending Coalition — a group of nonbank small-business lenders — announced a self-regulatory program during August that is designed to bring greater clarity and consistency to its industry’s pricing and consumer protections. The Small Business Borrower’s Bill of Rights outlines six primary principles that those signing the pledge will abide by when lending to small businesses. They include: The right to transparent pricing and terms, including a right to see an annualized interest rate and all fees The right to non-abusive products, so that borrowers don’t get trapped in a vicious cycle of expensive reborrowing The right to responsible underwriting, so that borrowers are not placed in loans they are unable to repay The right to fair treatment from brokers, so that borrowers are not steered into the most expensive loans The right to inclusive credit access, without discrimination The right to fair collection practices, to prevent harassment and unfair treatment “Online loans with shorter terms, and high-priced loans have a higher degree of creating debt traps,” explained Conor French, director of legal & regulatory for Funding Circle, one of the coalition's founding members. “Borrowers in the online market need to be able to make an apples-to-apples comparison between lenders and between loans. We wanted to create a choice architecture that allows borrowers to see similar information.” Adoption of Industry Best Practices Helps Establish Clear Rules of the Road The adoption of self-regulatory standards by this group of small-business lenders is an important step in proactively addressing some of the concerns that policymakers may have about this emerging market. It also is vital to helping provide transparency and assurance to small-business owners that rely on affordable access to capital to start and operate a business. Non-bank small business lenders often fall outside some of the regulatory framework that regulated entities must meet. However, as new innovative underwriting solutions will sometimes incorporate the consumer credit history of the business owner or entrepreneur, the line between consumer and business regulation can get blurred. The self-regulatory pledge incorporates many of the themes that have been part of the Consumer Financial Protection Bureau’s push for transparency across the consumer financial marketplace, including the short-term lending market. "Online loans with shorter terms, and high-priced loans have a higher degree of creating debt traps.” Conor French Director of Legal & Regulatory Funding Circle     “Abuses can come from lenders, brokers or other unsavory players,” French noted. “For example, if you're using a broker or partner, are there conflicts of interest? Are they arranging the deal that’s best for you or best for them? Only by having open transparency can you understand what your options truly are. You can't just accept what someone else chooses for you at face value.” Self-Regulation Shows Self-Discipline and Addresses Evolving Public Policy Priorities Industry self-regulatory standards, such as the Borrower’s Bill of Rights, can be a good way for market leaders to demonstrate self-discipline by responding to the evolving public policy priorities of legislators and regulators. Industry self-regulation can be preferable to legislative or regulatory changes in some cases because it is flexible and can accommodate evolving market trends and consumer expectations. This is especially true when considering markets where innovative, disruptive technology and products are being developed, such as that of small business lending and peer-to-peer markets. The fact is that the development of regulations takes considerable time. Self-regulation can change more quickly as technology and markets evolve and mature. Industry self-regulation can help to provide transparency and protect consumers without impeding innovation. “Ultimately, I think government regulation of this market is inevitable,” French conceded. “But, we don't know when it will happen, who will write the standards or who will manage enforcement. We believe by encouraging responsible self-regulation, we're not only forestalling federal involvement, but also creating a model for what the government should do should it step in.” Gaining Critical Mass and Ensuring Accountability There are challenges when it comes to ensuring the effectiveness of a robust industry self-regulation regime. First, it can be difficult to have entities outside of the industry leaders to adopt and abide by the best practices. For small and medium-sized entities, the development of self-regulation may seem like a barrier to growth. Demonstrating the need and value of industry self-regulation to all market participants, regardless of size or market share, is essential. Another key hurdle is that any industry self-regulation must be accompanied by clear and well-respected accountability measures. Self-regulatory pledges are only as good as the accountability measures that ensure compliance. Without being held responsible for meeting industry best practices, regulators are unlikely to take the self-regulation seriously and may be more willing to cite the need for new regulation to address a market failure. However, accountability measures that have real teeth and oversight from a third party, such as a trade association, help to ensure that the industry takes the matter seriously and additional action from regulators is unnecessary. “Our Small Business Borrower’s Bill of Rights is currently being enforced by the Small Business Majority, a nationally recognized nonprofit organization,” French stated. “Having third-party endorsement helps avoid any conflicts of interest. As for actual penalties, we believe that reputational risk is quite significant.” Experian has experience implementing industry best practices Experian has considerable experience with the adoption of industry best practices across all of our businesses. Most notably, we worked closely with our competitors and clients to develop and implement enforceable self-regulation for the digital marketing industry. The Digital Advertising Alliance’s (DAA) self-regulatory regime has allowed for innovation and growth to continue, while at the same time enhancing transparency and consumer protection. Since its inception, there have been more than 50 million unique visitors to the DAA program websites, where consumers have been able to not only exercise their choice to opt-out of digital advertising, but also receive detailed education about the program. Experian looks forward to working with clients in the online marketplace lending segment as they implement the Borrower’s Bill of Rights in an effort to improve transparency and understanding of this market. 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?

This week, we invited Charles H. Green to offer his perspectives on the online marketplace lending sector. The following article is his contribution to our series on marketplace lending. The phrase “man bites dog” is an aphorism in journalism that describes how an unusual, infrequent event (such as a man biting a dog) is more likely to be reported as news than an ordinary occurrence with similar consequences, such as a dog biting a man. In other words, an event is considered more newsworthy if there is something unusual about it. Thus, the headline above likely will draw more attention than the same story with the headline “Hedge fund offers to refinance consumer loans for 7 percent APR.” While both parties might actually own a portion of the same loan portfolio in today’s “sharing economy,” known in financial services as “peer-to-peer lending,” this kind of loan is one of many that have evolved on the Internet under the new financial industry sector labeled “marketplace lending.” Online marketplace lenders, funders, and investors have caused quite a stir over the past couple of years by offering alternative financing products and platforms to serve consumers and businesses that may have trouble securing a loan from traditional financial services, i.e., banks. But what’s so radically different about what they do, other than using a Website rather than a drive-up branch to initiate a financial relationship? After all, don’t both extend money to another party with strings attached — that is, conditions about who gets the money, how much and when they promise to repay it, as well as the consequences if they don’t? It seems like a better “alternative” would be to simply win the lottery! In fact, there is plenty of “alternative” in alternative lending, and in a relatively short period of time, the results have been phenomenal for consumers and businesses alike. What’s so different? For starters, the submission process for loan applications varies greatly. Due to supervisory oversight of the industry and a conservative lending culture, applying for a bank loan often means that a more complete disclosure of personal and business information is required. The aftereffects of the Great Recession and housing bubble meant that many banks curtailed most lending altogether until their balance sheets recovered, On the flip side, online lenders process applications with very little information —generally about 40 data points. This is because these lenders leverage the information and often ask for a borrower’s authorization to gain access to the cloud, where they can acquire more data on a borrower. Furthermore, online lenders have a narrow focus on where they are willing to lend money, so their decision analytics focus more precisely on a smaller set of information that really determines the risk for that particular type of loan. This leads us to how online lenders make credit decisions. Most use proprietary algorithms that weigh various data collected from a borrower’s application and reach a decision based on the numerical score produced at that time. There’s little human intervention to sway the verdict positively or negatively since the decision matrix was developed by testing millions of blind data files with historical loan outcomes to measure and manage their exposure to credit loss. There are plenty more differences in the online lenders’ approach, but probably none more important than the customer experience. Online loan applications can be submitted 24-7, and a borrower will be “conditionally qualified” or declined usually within minutes. Final credit approval often comes within a couple of hours, and funding might be in 48 to 72 hours. How can they do it? The answer lies primarily within four factors: 1) These companies are driven by innovation, with technology used to address many aspects that we don’t like about traditional lending; 2) Online lenders are not banks, and as such, they are relatively free of the regulation that comes with accepting public deposits to fund their operations; and 3) By focusing on a smaller niche of prospective borrowers, online lenders don’t try to be everything to everybody but rather specialize to serve a smaller set of clients better. 4) These companies have developed niche products to satisfy the particular needs of each market. What happens next? Is the end of commercial banks as we know them at hand? No. While the rise of online marketplace lending has been meteoric and the industry climbed to an admirable $9 billion of funding in 2014, it is a very small portion of the trillions of dollars funded by traditional banking today. Still, what they do is attract plenty of attention in the trade. Expect to hear more about strategic partnerships, acquisitions, and other flattering forms of imitation, as the banking industry will adopt and adapt many of the inspiring improvements brought by the online marketplace lending sector. Both sides will win, but the real prize goes to consumers and small-business owners who will have a more robust and competitive environment to get financing capital in the years ahead. About Charles H. Green Charles is Managing Director of Small Business Finance Institute, which provides professional training to commercial lenders for banks and nonbanks. He has written extensively about the marketplace lending sector, including the recent Banker’s Guide to New Small Business Finance (John Wiley & Sons, 2014). Earlier in his career, he founded and served as President/CEO of Sunrise Bank of Atlanta. 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?

Disruptive technology has radically changed how we shop, socialize, book vacation rentals — and even how we hail a cab. Now we have another Web-based disrupter upending yet one more venerable American institution: how we secure small-business loans. Over the past two to three years, online marketplace lending (OML) — also called alternative lending — has made dramatic changes in the landscape of financing businesses. Companies like OnDeck, Kabbage, Funding Circle, CanCapital, Lending Club and dozens of others have created what amounts to a $1 trillion market, according to a recent article on TechCrunch. This doesn’t mean that OML is going to send traditional banks the way of typewriter and buggy whip makers. Your neighborhood bank branch and small-business lender still do and will have an important function to perform. But strict regulation and rigid business models within the traditional lending industry have left major gaps when it comes to funding activity in the small-business marketplace. It is in these voids that creative and aggressive entrepreneurs are finding not only amazing business opportunities, but also an entire class of customer that until now has been grossly underserved. What is online marketplace lending all about? How does it work? Why is it so attractive? Who are the customers? And why now? The answers to all these questions lie in one of those serendipitous confluences of economic necessity, technological advancement and entrepreneurial creativity that creates a paradigm shift in what we believe is possible. The result is a new model for commercial financing that may soon become the primary medium many small to medium-size companies use to secure the capital they need to grow and prosper. Over the next eight weeks, Experian® will deep dive into the State of Online Marketplace Lending, examining the lending market from all sides, piecing it together with opinions from thought leaders throughout the space and publishing our findings in a compendium ebook. Let’s begin by tracing this trend to its source. The roots of online marketplace lending It is said that the Chinese character for disaster is the same as that for opportunity. If so, then it makes sense that the disastrous Great Recession of 2008 to 2010 should serve as the crucible from which the alternative lending industry should spring. When the economy crashed in 2008, the Western financial industry responded by replacing its overly lax lending requirements with regulations and lending standards so strict that many businesses, especially younger or smaller ones, found it all but impossible to secure financing under any conditions. Having been burned by their formerly liberal attitudes, banks and other traditional lenders decided the best way to minimize risk was to avoid lending to all but their most financially secure customers. (In other words, the only way to get a loan was to prove you didn’t need one.) Enter the online marketplace lenders. OMLs — particularly peer-to-peer lenders — began to appear a year or so before the market crashed. The rise of Facebook and similar social media platforms coupled with rapid advances in Big Data management allowed those with capital to quickly qualify potential customers via the Internet and issue short-term loans without the red tape and regulations that made borrowing from banks such a challenge. "Technology is what has made online lending possible, online lenders benefit from having a much lower cost basis than banks. As a result, they can price their loans differently. And they can often make their lending decisions on the same day they receive an application.” Laura DeSoto Senior V.P. Strategic Initiatives   Once the Great Recession hit in force, small and medium-size businesses, finding that traditional capital sources had dried up like Lake Shasta in the California drought, flocked to these aggressive start-ups en masse. OML marketing messages soon became ubiquitous, ranging from 30-second radio spots to robocalls to business owners’ cell phones. Web-based payment services like PayPal began to offer their own business capital lending programs. To the surprise of the cynics, many of the new lending platforms actually worked. Businesses were able to borrow the funds they needed. Lenders enjoyed solid returns on their investments. And consumers reaped the benefits of an economy offering a broader range of goods and services. Today, OML looks like it’s here to stay — which is not to say that banks have reason to panic. “It’s important to note that many online lenders actually get their funds from traditional banks,” DeSoto stated. “Some people call OMLs ‘shadow banks’ because they’re able to use banks’ funds in ways that are not subject to all the same federal regulations.” What makes online lending “alternative” It is not just the source of the loans that distinguishes alternative lending from traditional commercial banking. The method, speed, qualifications and form of the loans themselves are also distinctive. As the name implies, online lending is done via the Internet. Borrowers need not walk into a brick-and-mortar bank to fill out reams of mind-numbing paperwork. Instead, they need only fill out a usually brief online application and attach whatever documentation the lender requires. What kind of documentation? Often, alternative lenders don’t require the detailed financial statements and tax returns commercial banks demand. Instead, a month or two of retail receipts may be all that’s necessary. This is because many alternative loans are not the long-term, interest-based instruments to which we’re accustomed. Instead, many alternative lenders use “factoring” or revenue-based lending in which they take a small portion of each sale as repayment on the loan. Steady cash flow is more important than yearly sales volume or annual profits/losses. Another popular vehicle is so-called “peer-to-peer” lending that often involves small loans of $5,000 to $50,000 with terms of just one to five years. And now that online lending has become legitimate in the eyes of many, we’re seeing loans or “working capital advances” in the millions of dollars. Like the most sophisticated banks, many OMLs — even some of the smaller ones — have access to advanced algorithms that allow them to evaluate a potential borrower’s suitability based on readily available business credit data in addition to cash flow, and activity data. But because their systems are mostly or even totally automated, OMLs can prequalify applicants in a matter of hours, if not minutes. Following prequalification, additional documentation may still be necessary before a loan is approved. Of course, the larger the loan, the more documentation lenders require. Online lending reduces paperwork, but it doesn’t eliminate it altogether. “Some companies still rely partly on manual application reviews. Some even promote their ‘live’ customer service,” DeSoto noted. “Still, it probably won’t be long before most online lending is 100 percent automated.” Are you a candidate for online marketplace lending? The ideal candidate for today’s online marketplace lending is a small to medium-size retail or commercial B2B company with a steady cash flow and a need for small, quick cash infusions to buy new capital equipment, hire new personnel or otherwise expand operations. Restaurants, retail stores, and B2B service companies like office equipment suppliers and marketing/ad agencies fit this profile perfectly. Because cash flow is essential, most marketplace lenders are not interested in financing start-ups. These are still the purview of venture capitalists. Most online lenders also are not interested in manufacturing companies that make perhaps one or two large sales every couple of months. Expanding the market, not cannibalizing it DeSoto stressed that online lenders are not taking business away from traditional lenders but are serving customers who probably would not qualify for traditional business loans. As such, they’re expanding the market, not cannibalizing it. “Most small businesses that have been in business just one or two years wouldn’t even be on a commercial bank’s radar,” she noted. “These people would otherwise have to rely on friends, family or personal credit for funds. Online lending offers opportunities that simply did not previously exist.” The role of business credit information The role of business credit information — including any history of missed payments, delinquencies, pending judgments, bankruptcies and overextended lines of credit — is obviously critical to marketplace lenders’ ability to quickly and accurately assess risk and advance capital responsibly. “Experian, the industry leader in consumer and business credit reporting, is proud of the part we play in making marketplace financing available to thousands of businesses nationwide and of the good this new and growing industry sector is doing to expand the economy” Laura  DeSoto concluded. So in summary, a few key points about online marketplace lending: Online applications usually are fast and simple and require minimal documentation Technology allows lenders to prequalify borrowers in hours, sometimes minutes Loans can be as low as a few thousand dollars or as high as several million dollars Most lenders eschew traditional long-term interest rates in favor of cash flow or other short-term repayments Prime customers are small, younger retail or services businesses with high, consistent cash flow Online lending is expanding the market, creating opportunities where none existed previously In future articles, we will dive even deeper into the world of alternative and online lending, identifying the major players, looking closer at the risks and benefits, and predicting as best we can where the industry is headed. Next week, Charles H. Green from AdviceOnLoan will join us to examine how different yet similar online marketplace lending is to traditional lending.   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?  

Originally designed as a cloud-based alternative to expensive software that was not flexible, Salesforce.com has become the platform of choice for many companies. To take full advantage of the many capabilities Salesforce provides and to avoid re-creating department silos that exist with most CRM/ERP platforms, more operational business groups are moving to Salesforce to take advantage of built-in features such as 360-degree prospect and account views, workflow, approval queues and tasks. Until now though, credit departments have typically operated in their own silo, accessing customer credit information through proprietary credit and risk management systems. At Experian, we are seeing an increasing need by finance and credit departments to be able to request, review and store our commercial data within Salesforce and quickly respond to credit requests from prospects as well as perform periodic account reviews of existing customers. To solve this disconnect, we have created Experian FusionIQ™, a new Salesforce.com Lightning-compatible app that enables B2B organizations to easily integrate Experian business and commercial credit information into their Salesforce.com CRM instance. With Experian FusionIQ™, we enable credit departments to make better credit decisions while increasing efficiency through easy access to our data. Salesforce.com no longer just for the sales department According to a recent study of financial services companies looking to deploy Salesforce.com, sixty four percent of respondents anticipated productivity gains; fifty percent expected a boost to enhanced cross-functional collaboration; fifty four percent anticipated increased visibility to customer information and thirty eight percent expected improved customer experience. Financial services companies are transitioning from utilizing Salesforce solely as a sales application to leveraging it as a platform for delivering customer engagement. Here are some of the things you can do with Experian FusionIQ™: Get a 360-degree view of all your customer accounts Payment history, public records and credit ratings are key factors when determining whether to pursue new customers or grow existing accounts. The Experian FusionIQ™ app allows you to centralize this critical information within the Salesforce.com environment, giving full transparency to key stakeholders within your organization. Your sales, finance, credit and other internal departments now can work together to optimize resources and prioritize accounts. When the Sales Department can't easily share information with the Credit and Finance departments, the approval process slows down, opportunities are lost, and customers aren’t retained. The Experian® FusionIQ™ app seamlessly adds the business risk data all your key internal stakeholders need within your Salesforce.com environment. Reports, Scoring, Alerts and Decisioning features are available to everyone on your platform, allowing them to make key review decisions in real-time. Create more proactive account-management workflows What is your process for monitoring significant changes in your accounts? The Experian FusionIQ™ app provides instant notification of late payments, defaults, bankruptcies and other changes in your customer and prospect accounts right within your Salesforce.com environment. Migrate your existing BusinessIQ℠ services into Salesforce.com Are you already using Experian’s BusinessIQ℠ to track your accounts’ credit statuses? The Experian FusionIQ™ app allows you to migrate the BusinessIQ services you’re already using into Salesforce.com easily to eliminate bottlenecks and accelerate decision making. Virtually no IT resources required The Experian FusionIQ™ app is designed to integrate automatically with your existing Salesforce.com platform with virtually no additional coding required. Out-of-the-box features give you access to reports, alerts and decisioning. Configure existing Salesforce.com features such as workflow, notifications and reporting to streamline your credit process. FusionIQ for Salesforce.com Lightning Demo  

Credit departments have long performed the important role of assessing and monitoring the health of new and existing customer accounts. However, in the wake of the Great Recession and the ensuing slow economic recovery, the need to evaluate the health of supply chain partners has become even more important. In my role here at Experian, I talk to people every day in credit and supply chain management, and I’ve found striking similarities in the roles of both groups. First, each group has an interest in understanding risk when establishing new relationships, whether it be assessing the credit risk of a new customer or determining the financial stability of a critical vendor. Second, both have a shared interest in monitoring the financial health of both customers and vendors (although it could be argued that the potential disruption associated with the loss of a key vendor might carry a much higher impact for a supply chain manager than having to collect on or even charge off a customer account would for someone in credit management.) For example, a major battery supplier for one of the leading electronic vehicle manufacturers ran into financial trouble recently, and it caused all kinds of headaches. The stock price , sales and customers all suffered. The battery company was the sole supplier to this vehicle manufacturer. With proactive credit monitoring, the vehicle manufacturer may have been able to spot signs that the vendor’s financial stability was beginning to deteriorate, and the headaches could’ve been avoided. Thankfully things worked out in the end (the vehicle manufacturer went into the battery production business.) All in the family Business family relationships are also important in credit and supply chain management. Credit professionals would be interested in Corporate Linkage because they really want to know how to manage a particular customer. Understanding if an account is a subsidiary of a parent company that they have an existing relationship with is vital, as it can affect potential opportunities or responsive strategies if they are delinquent. These insights can help make a more informed decision. For example, a credit manager may think twice about aggressively pursuing an account that may even be moderately delinquent if they realize that they also have a sizable relationship with the account’s parent company. By contrast, they might take a firmer approach with a smaller customer who is behind on their payments, but represents a significantly smaller overall spend. On the supply chain side, visibility into the structure of a parent company is also important, because if the parent company runs into financial trouble it’s likely to cause a domino effect that could quickly steamroll into a supply chain crisis. Understanding and monitoring a supplier’s corporate family relationships enables managers to ensure that they truly have adequate supply chain redundancy. As much as Corporate Linkage informs relationship management in credit accounts, it can help the supply chain manager understand how their spend contributes to the suppliers bottom line, creating additional opportunities for spend management. A supply chain manager that knows they are doing business with three subsidiaries of the same company puts them into a much stronger negotiating position when it comes to volume discounts than if they were viewing the businesses as separate suppliers. Industry Groups Focusing Attention One example of an organization paying attention to the converging credit and supply chain management methodologies is Burbank, California-based Credit Management Association, who recently established a Supplier Risk Management Group. Group Facilitator Larry Convoy agrees that credit management is critical to the health of the supply chain saying recently “During my time in credit management, I’ve often heard the following: ‘We can survive if a customer relationship goes bad, but we cannot survive if one of our primary or secondary vendors has an interruption in delivering product, raw materials or services to us.’ For that reason, we invest an equal amount of resources investigating our vendors. We've created an industry credit group based around this idea for our members, as these relationships can make or break their businesses.” Reducing Friction, Increasing Efficiency To take it a step further, credit professionals and supply chain managers are focused on reducing cost and friction, while increasing efficiencies. A client recently said that it takes 15 minutes for an analyst to review the paperwork they require of a new account that does not pass automated vetting, but on average it takes 10 days for the analyst to get the required documentation from the applicant. In some cases, businesses are limited to working with suppliers that are located within their geographical area for logistical reasons. These companies walk a fine line between operational efficiencies and assuming the right amount of risk. If the risk assessment process is too intrusive, the supplier may walk away. Asking for additional information and delays in establishing the account may put a strain on the relationship at the outset, so using third-party data sources in the risk assessment process can help enhance efficiencies and reduce exposure while maintaining a positive supplier relationship. Delinquency vs. Default One difference between credit management and supply chain is that credit departments are typically concerned with predicting customer delinquency and cash flow, while supply chain management tends to be more focused on assessing the risk of supplier default. However, if a supplier plays a critical role in the supply chain, or is not easily replaced, monitoring the supplier’s financial health is vital. It may be the difference between having to shore up a key supplier financially if there begins to be signs of increasingly delinquent payment versus having the supply chain come to a screeching halt if the supplier suddenly fails. Risk Management Trends Many credit management professionals in financial institutions used macro-economic data during the Great Recession to identify potential regional credit trends that could impact the health of their portfolios. This approach may also be valuable to supply chain managers who want to keep regional economic downturns from disrupting their supply chain. It’s smart to assess not just the supplier’s credit, but also how regional credit trends in the supplier’s area may impact the supplier’s financial health. For example, according to Experian , four of the top five metro areas for bankruptcies in the transportation industry are in California. If a company relies heavily on a transportation company in California and that supplier is somewhat dependent on their local market for their ongoing financial wellbeing, it might be wise to have additional transportation suppliers who can provide similar services, but who are headquartered in less economically volatile areas of the country. At the end of the day, there are far more commonalities than differences between credit and supply chain management. Utilizing proven credit risk management tools, and the data that powers them can help reduce weak links in the supply chain and help steer clear of unpleasant surprises. To learn more about Experian risk management solutions contact us at https://www.experian.com/b2b or call 877 565 8153.  

In 2014 the Subcommittee on Small Businesses and Entrepreneurism published a report that said only 4% of the total dollar amount of business loans go to Women owned businesses. After hearing of this report, Experian Decision Sciences decided to conduct a study of Women Business Owners to see how they were doing. The big "ah ha" moment for us was when we looked at this data and discovered how similar the Men and Women's credit profiles were. The commercial Intelliscore Plus scores were quite similar, the consumer credit scores are very similar, so we wondered why only 4% of small business loans was going to Women. One potential reason why Women might not be getting the credit they deserve on the business side is the credit utilization rate on their consumer credit. Utilization rate is the balance-to-limit ratio, and it tends to be higher for Women owned businesses than it is for Male owned businesses. And that could be a legitimate reason why lenders are perceiving Women owned businesses to be higher risk. Another aspect of our study pertains to the industries Women and Men are working in. Women owned businesses tend to be focused on personal services like beauty shops and child care, while Male owned businesses tend to be focused on industries like general contracting. Why is this important? Because the mix of industries carries different levels of sales amounts. We know that 14.5 percent of Women owned businesses have sales above $500,000 while Male owned businesses have 24 percent that have greater than $500,000 annual sales. It's important for business owners to understand all aspects of their credit, because the more that they understand, the more power they will have when they go in to apply for a loan. We created two Snapshot Infographics for this study which show the differences between Women owned businesses and Male owned businesses.  

Imagine for a moment a young parent who has been laid off from their job. After months of looking for work they still have not found a job. To make ends meet they start doing landscape work for neighbors in the area, eventually jump-starting a landscaping business to provide for their family. With some hard work, they start to build up a clientele in the local neighborhood. While they are starting to get back on their feet slowly, they realize at the current rate, the business will not completely meet the needs of their young family. If they could borrow just $3,000 to buy some more mowers and trimmers, however, they could hire two friends and double the size of the business. With that in mind, let’s assume that they have a mediocre credit score, their credit card has a credit limit of $1,000 and they are maxed out. Furthermore, they don’t own a home to borrow against, and the loan size they are seeking is too small for a bank to even consider. However, if they could get a $3,000 loan, they could expand their business, create two new jobs and better provide for their family. There are folks just like the person described above all across the country looking for help. But where do they turn? Alternative financing options provide an avenue for entrepreneurs and other small business owners looking for commercial funding, who are otherwise turned down from more traditional financial institutions, such as banks and credit unions. By leveraging business credit data from credit bureaus, such as Experian, as well as other data sources, alternative financers are able to make lending decisions and extend credit to this segment of small business owners, enabling them to finance their company’s growth, ultimately stimulating the economy. One example of an alternative financer using such data to help open opportunity for small businesses is Opportunity Fund, a non-profit micro lender in California. Otherwise known as Community Development Financial Institutions, these micro lenders aim to create economic opportunity for underprivileged businesses in the U.S. And the need for these alternative financial institutions in California is critical. Despite recent upticks in our economy nationwide, things are still very tough in the Golden State. New data released by the Corporation for Enterprise Development (CFED) show many Californians are still struggling to gain a foothold in the economic recovery. CFED’s 2015 Assets & Opportunity Scorecard ranked California 50th among all states and the District of Columbia, for its large number (15.8 percent) of underemployed workers, 49th for both its home ownership and housing affordability rates, and dead last (51st) for high school degree attainment. Source: Corporation for Enterprise Development (CFED) Needless to say, there are a number of small business owners in California looking for financing to help grow their business. Organizations like Opportunity Fund help these business owners find affordable funding, and educate them on what they need to know about expanding. How alternative financers are helping? Opportunity Fund CEO, Eric Weaver & Rosa Funes A prime example of how alternative finance options are helping small businesses is the story of Paradise Flowers and Gifts. In Opportunity Fund’s most recent video, CEO Eric Weaver describes first meeting Rosa Funes, and how she described her longtime love of flowers. As a loan officer at the time, Eric described going to Rosa’s home and knocking on her door. She needed $500 to start a flower business. The amount was smaller than they had ever considered, but Eric was so moved by her story and her drive that he looked at her and said “Yes”, and told her “Rosa, you have a dream, don’t stop.” Alternative finance options, like Opportunity Fund are working hard every day to help small business owners and entrepreneurs gain the financial footing they need to succeed. After all, they are the backbone of our economy. The work that Opportunity Fund and other alternative financers have done will create a powerful ripple effect to drive economic opportunity across California, and the rest of the country. It’s the perfect example of how data can be used for the betterment of society and helps these smaller entrepreneurs grow.

Building financial capability and improving access to credit is essential for economic growth in our country. This is especially true for entrepreneurs, many of whom rely on their personal consumer credit standing when applying for a loan for keeping their small businesses strong or for a capital injection to expand their operations. While commercial lending has made a steady increase since the height of the recent economic recession, a recent report from Experian finds that women business owners continue to trail their male counterparts when it comes to commercial and consumer credit scores. Gender gap in access to both commercial and consumer credit The findings make clear that a gender gap exists in both commercial and consumer credit files: The average commercial credit score for a woman-owned business is 34, while the average score for a male-owned business is 35; The average consumer credit score for women business owners is 689, compared to 699 for male business owners; More than 22 percent of male-owned businesses have at least one open commercial trade line, while the same can be said for only 18.5 percent of women-owned businesses; In the last 24 months, female business owners had an average of 1.3 personal accounts become 90-plus days past due, while male business owners had an average of .9 go delinquent. This has a direct and quantifiable impact on the bottom lines for women-owned businesses. For example, Experian’s analysis found that more than 24 percent of male-owned businesses have sales that exceeded $500,000, while only 14.5 percent of women-owned businesses see sales of that size. In addition, 21.2 percent of male business owners have a personal income of $125,000 or greater, compared to just 17.4 percent of women business owners. Policymakers recognize the need to improve credit access for women-owned businesses Developing sound public policy to improve access to credit — especially for women and minority-owned business owners — is a top priority for policymakers in Washington, DC. In July 2014, then-Senate Small Business Committee Chair Maria Cantwell (D-Wash.) released a report, entitled “21st Century Barriers to Women’s Entrepreneurship.” The report took a wide-ranging look at some of the challenges that women face in starting a business. In particular, it found that “$1 of every $23 in conventional small business loans goes to a woman-owned business.” Look for legislative proposals to aide small business owners Look for Congress to continue to discuss policy proposals aimed at increasing access to fair and affordable credit for consumers and small business owners alike. One such proposal that has garnered bipartisan support would make it easier for utilities and telecommunication providers to report positive, on-time credit data to the nation’s credit bureaus. While they have long made pricing decisions based upon the full-file credit data furnished by traditional creditors, like lenders and retailers, telecommunication and utility companies have historically only furnished derogatory data, such as when an account is in collection. Including both positive and negative data from these sources will enable tens of millions of thin-file consumers — and small business owners — with a proven record of meeting monthly financial obligations to access fair and affordable credit. Experian welcomes the opportunity to work with policymakers to help improve access to fair and affordable credit for consumers and small business owners alike. Resources for business owners Understanding and monitoring their company’s business credit profile to ensure it is in good standing is essential for small-business owners to gain access to necessary capital. With the insights that business credit reports provide, small-business owners can take the appropriate actions necessary that will positively impact their business. Experian provides some helpful resources to help small-business owners gauge the health of their business, including: BusinessCreditFacts.com — An authoritative source for understanding and learning about the benefits of managing business credit. Visit http://www.businesscreditfacts.com. Experian Business Credit — A site that enables small-business owners to access a copy of their business credit report as well as understand the impact that maintaining a positive credit profile can have on a small business. Visit https://www.experian.com/businesscreditreport. Business Score Planner™ — An education tool for business owners to understand how financial plans and changes to commercial credit information can impact a business credit score. Visit http://sbcr.experian.com/scoreplanner.  

Ten years ago movie night at our house would usually include a run to the video store where we would pick out a selection from the New Arrivals section, some candy, perhaps some popcorn and we would have our fingers crossed the selection was a good one. Nowadays it’s not uncommon to find us binge watching streamed episodes of “House of Cards” or “Mad Men on weekends.” What’s even more gratifying is after watching “House of Cards” unprompted, Netflix now recommends “The Newsroom” and other shows we invariably like. How do they know we would like these shows? This is predictive marketing at work, driven by big data. Netflix has developed sophisticated propensity models around each member’s viewing habits, and the net result is a better viewing experience with the service. We make amazing entertainment discoveries every week. In business marketing propensity models will determine which prospects or customers are likely to respond to a particular offer. For example, the marketing department of a large financial institution seeking to expand their commercial small business loan portfolio, might want to segment and target commercial lending offers to a concentration of customers most likely to accept a particular offer. When applied in business, propensity models can unlock opportunities for increased profit, share of wallet and deeper engagement with prospects and customers. At Experian, in a typical propensity modeling engagement we will first meet with our customers to understand their goals and objectives. We talk first about pre-screen criteria that enable us to screen out prospects that would not fit into the criteria. A sporting equipment manufacturer would probably not sell to companies in the mining or agriculture industries, so we weed out the ones least likely to lead to a successful conversion. Our data scientists and statisticians get to work on large data sets and evaluate a number of factors. Experian will then develop a customized response model that will identify significant characteristics of responders vs. non responders and therefore will maximally differentiate responders from non responders. Since (holding other factors constant) a higher response rate is preferred, a response model can help lower the cost per response. The response model will generate a “score” that can be used to rank order the prospects base in terms of response likelihood. The response model can be used in two different ways to achieve maximum effectiveness. It can be used to optimize the number of responders for a given sized solicitation, or it may be used to minimize the number of solicitations in order to achieve a budgeted number of responders. A high response score will indicate someone who is likely to respond, as is shown graphically in Exhibits 1 and 2. This work results in a model of the ideal target to which an offer would most likely resonate with. This is called a lookalike. The marketing department at our large financial institution might start off with a large list of potential candidates to send the offer via direct mail, 1 million for example. But mailing an offer to that many people may be cost prohibitive. A propensity model can identify prospects most likely to accept the offer, so your direct mail campaign is more targeted, thereby increasing ROI. A highly targeted mailing to your ideal targets is a safer bet, and would make for a much more predictable outcome. The marketer can feel more confident mailing an offer to lookalike prospects because the chances of successful conversion are that much higher. That’s the case for Woodland Hills based ForwardLine, who have been providing alternative short-term financing to small businesses since 2003. Working with Experian Decision Analytics, ForwardLine did an analysis of their direct marketing program and determined that 22 percent of direct mail was generating 68 percent of their underwriting approvals, exposing a significant gap in wasted marketing funds. The Experian Decision Analytics team developed a custom model which enabled ForwardLine to algorithmically target lookalike prospects with a higher propensity to convert into a successful loan engagement. Michael Carlson, V.P Marketing, ForwardLine ForwardLine Vice President of Marketing, Michael Carlson is thrilled with the initial results. “Working with Experian we were not only able to improve performance, but we are able to reduce our marketing spend, while achieving the same results. We have taken our direct marketing effort from a small program that was profitable, but not meaningful in terms of generating significant volume, to working with Experian to achieve remarkable results. It’s largely why we enjoyed 20 percent growth this year.”     Best in Industry Credit Attributes Experian clients use our archived Biz AttributesSM along with collection specific data elements as independent variables for propensity model development. Experian’s Biz AttributesSM are a set of commercial bureau attribute definitions (includes several key demographic attributes as well) which are accurately developed off Experian’s Commercial BizSourceSM credit bureau. When used for response model development, Biz AttributesSM provides significant performance lift over other credit attributes. Biz AttributesSM are also effective in segmentation, as overlay to scores and policy rules definition, providing greater decisioning accuracy. Additionally, at Experian we are constantly monitoring our growing data warehouse looking for ways to develop new attributes. We live in an ever changing market place which requires us to develop new credit and demographic attributes as well as making enhancements to existing attributes. This process takes a disciplined, rigorous, and comprehensive approach based on experience guided by data intelligence. Our goal is to provide world-class service and the industry’s best practices for modeling attributes. To keep pace with market changes, new attributes are developed as new data elements become available, while raw data elements and existing attributes are monitored and managed following rigorous and comprehensive attribute governance protocols to ensure continued integrity of attributes. If you would like to learn more about propensity models, contact your Experian representative today.