Loan Zone: Using alternative data to expand member business lending

Traditional checks may be too strict to serve deserving entrepreneurs and organizations that lack credit history.

Within a traditional credit file, lenders consider the “five Cs of credit” to determine whether a small business is worth the risk for a loan. These include credit history, capacity to repay outstanding debt, collateral, capital and conditions, such as the loan’s purpose or the economic environment. Yet many small businesses seeking funding may not have a traditional credit file, which means their applications would be declined if their bank or credit union evaluated their loan application on the basis of the five Cs.

Small businesses are often among the most valuable members for credit unions, but rigid credit requirements can work against self-funded entrepreneurs and organizations with little or no credit history. This makes it hard for credit unions to increase the number of small businesses in their loan portfolios, leading them to either spend more marketing dollars to attract loan applicants or loosen underwriting criteria to approve more existing applicants.

Instead of increasing marketing spend or taking on riskier loans, credit unions can leverage alternative data to better assess the creditworthiness of small businesses and ultimately expand their portfolios without compromising credit quality.

 

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