Removing the Personal Credit Score from Small Business Lending

The long term success of a small business is often determined by their ability to access financing. Launching that next marketing campaign, hiring more employees during a seasonal rush, or purchasing new equipment to increase output are all ways business owners can expand their businesses and move up to the next level.

Unfortunately, accessing the capital needed to fund this growth has long been a problem for Main Street businesses. One of the biggest problems business owners face is that they are frequently judged not on the health of their business, but on their personal credit score. This is because it has historically taken a significant amount of time (and cost) for a bank to truly analyze the financial health of a local auto repair shop or florist who is searching for a $20,000 loan.

However, many small business owners have already tapped into their own personal finances and credit to help bankroll their business, and as a result their personal credit score has suffered despite a strong business. This means that many creditworthy businesses are often prevented from securing bank financing, leaving them struggling to find ways to grow their business. This leaves them no choice but to look to alternative sources who are using different evaluating tools to determine if a business is healthy and worthy of capital.

Seeing as virtually every possible industry has been made more efficient through digital improvements, it’s no surprise that many key players are adopting this ideology in order to better service this traditionally underserved market: the millions of Main Street restaurants, retailers, and service businesses that are a critical segment of our economy and will serve as a key engine for job creation.

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On Deck is one company helping to solve this problem by removing the personal credit score from small business lending by compiling digital information—including credit data, online banking data, and merchant processing information—to create an electronic profile of each business and to judge their creditworthiness. There are also several other resources levering technology small businesses can utilize. Among them, there are matching services such as Lendio and Biz2Credit, who connect borrowers with the appropriate lenders. With these services, a small business’s lending request will be down to hundreds of lenders on their system who may be interested in funding their request.

There are also social lending sites that connect borrowers with individuals or groups of people willing to lend at an agreed upon rate, such as Lending Club and Prosper. These resources provide a forum for business owners to go online and apply for loans, and then individuals or interested groups can view their credit profile, learn about the plans for the money, and, if interested, group together with others to fund the request.

It’s clear that technology is paving the way for small businesses’ increased access to capital. By using technology to find more efficient ways to analyze and judge these businesses, lenders can evolve past the credit score and increase their ability—and incentive—to again return capital to them.